Syrah Resources Does Not Have All The Answers

Small Caps | Jan 23 2020

While several factors combined to drive the price of graphite higher in the December quarter, brokers remain concerned this may not be enough to pull Syrah Resources out of the woods.

-Lack of clarity on Syrah Resources' price realisation and costs
-Demand for graphite remains the main catalyst
-The business is consuming cash and needs prices/volumes to rise


By Eva Brocklehurst

Restructuring and materially reduced production featured for Syrah Resources ((SYR)) in the December quarter, amid some success in stabilising prices after a disastrous slump in 2019.

Tonnage was heavily skewed to lower-value fines and, although the sales price rose, reflected a greater proportion of sales coming from coarse product stocks. To Morgan Stanley, this could mean the price drops again in the March quarter if the amount of fines increases. Coarse flake is a higher-priced material.

Yet, prices for fines started to rise late in the quarter as the impact of production cuts and a lower inventory tightened the market. This coincided with Chinese winter production cuts and reduced supply from Madagascar.

Management at Syrah Resources has also pointed out the proportion of its sales to China, the lowest-priced market, were aggressively cut. The Balama project, Mozambique, is only operating at the level required for maintenance, given the current price environment.

Recoveries were 68%, below the company's target of more than 80%. Achieving the targeted recovery and product splits at Balama are critical goals and Morgan Stanley also believes there is a lack of clarity on price realisation and costs.

A higher price was achieved in December, at US$458/t, compared with the US$391/t obtained in the September quarter when Syrah Resources initiated production cuts in response to deteriorating market conditions.

Subsequently, inventory at Balama fell in the December quarter, to 14,000t from 31,000t, so the excess supply has largely been removed from the market. Nevertheless, the largest driver of price recovery was the seasonal disruptions to natural graphite production in China, UBS asserts.

Chinese production is expected to ramp up in March/April 2020 so the company's disciplined production rates will be critical to maintaining a balanced market, the broker adds.

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