Pressure Mounts On Syrah Resources

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

The drop in the price of graphite has combined with several negative factors to put substantial pressure on Mozambique producer Syrah Resources.

-Balama consuming cash in 2020, cost reduction measures instigated
-Recoveries improving but remain below expectations
-Commercialising BAM key to the outlook
 

By Eva Brocklehurst

A slump in the price of graphite has caused Syrah Resources ((SYR)) to scale back production for the remainder of 2019 and 2020. This is designed to underpin a market which has been over-run by supply.

The decline in spot prices has also been kicked along by a sharp depreciation of the Chinese currency, as well as cuts to electric vehicles subsidies and trade tensions that have weighed on sentiment. Increasingly large quantities of flake graphite are also being exported from a privately-funded Mozambique mine.

Credit Suisse describes the deterioration in market conditions as catastrophic. Whether the company's strategy allows the market to tighten, enabling prices to increase, or simply allows an alternative producer to take the company's share is yet to be seen.

Without a price increase, the Balama project is consuming cash in 2020 and the broker considers the business in an increasingly perilous position. Cash will be consumed in 2020 despite the planned -20% reduction in the cost base.

Both Morgan Stanley and UBS are concerned about cash flow. The company has guided to -US$17m in net outflows from Balama in the fourth quarter, more than offsetting proceeds from the company's US$38m convertible note. The achieved price in the September quarter was US$391/t, down -14% on the prior quarter, whereas Morgan Stanley had estimated US$436/t for the second half of 2019. Cash costs were US$571/t.

UBS notes management has not provided an indication of spot pricing, but calculates a range of over US$300/t is required at a run rate of 5000t per month to generate outflows of US$17m per quarter.

In this scenario, both UBS and Credit Suisse assess there would be sufficient cash reserves to continue operating Balama until at least the December quarter of 2020. Management has outlined measures aimed at reducing costs (C1) by -20-25%.

This will be achieved through a reduction in personnel at Balama, the streamlining of senior management in Australia, contract renegotiations and reconfiguring mining and processing.

The company is guiding to 120-150,000t of graphite production in 2020, subject to demand. First production of purified spherical graphite is now expected in the December quarter because of delays in the provision of technical support during commissioning.

Recoveries

Recovery improved to 69% in the quarter and 71% was achieved in September through better process control and operating stability. Yet, 2020 recoveries are envisaged staying at around 75% which is a concern for Morgan Stanley.

Production of coarse flake graphite increased as a result of blending/screening improvements, while the percentage of coarse flake from the mine remained constant. However, UBS points out the cut to production is not sustainable over the longer term for a plant that is designed to run at much higher rates.

BAM

Work on the battery anode material (BAM) project will continue, targeting purified spherical product and producing final anode material, whilst developing a customer base and finalising a feasibility study in 2020. One positive aspect, Credit Suisse notes, is expenditure on BAM declines materially in 2020. Moreover, Chinese graphite production continues to be in long-term structural decline.

Incorporating the production reduction and new guidance, Macquarie reduces estimates for earnings per share in 2019 by -63% and 2020 by -114%. The broker notes the company has been struggling with market headwinds for some time and scaling back Balama may mean the market is more in balance.

However, Macquarie finds it difficult to envisage how the mine can re-enter the market without a significant increase in graphite demand and an improvement in product quality. Successfully commercialising BAM remains the key to the broker's outlook and valuation.

FNArena's database has one Buy rating (Credit Suisse), two Hold and one Sell (Macquarie). The consensus target is $0.70, signalling 83.6% upside to the last share price. This compares with $0.99 ahead of the quarterly.

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