A bad week for graphite stock Syrah Resources

Lithium was the hottest commodity trade in 2021/early 2022. Then it became the most crowded trade by the end of 2022. Now punters are eyeing graphite as the next battery metal in line for a romp. But ASX graphite producer Syrah Resources (ASX:SYR) is having a hard time of it lately, down over 15% this week. Despite having a leg up on junior peers like Renascor Resources (ASX:RNU) and Talga Resources (ASX:TLG) by way of being a producer already, Syrah is struggling to turn the rising graphite prices into profits. Syrah is still making losses shipping graphite from its Mozambique operation at Balama. In the 12 months to December 2022, Syrah received US$98.2 million in customer receipts against production costs of US$118.2 million. Free cash flow for the period was a negative US$134.8 million. That's the type of cash burn you'd expect from a mining developer about to enter production, not one already shipping product. To be fair, Syrah is partly a developer still. The miner is spending big on its Vidalia Active Anode Material facility in Nevada aiming to become a vertically integrated graphite supplier to the US and the EU. However, investors likely hoped that the Balama operation would be self-sustaining by now so the capital intensity could be focused on finishing Vidalia. Now Syrah is fighting a two-front cost war just as its cash holdings dwindled to US$90.4 million at the end of December 2022. Yes, Syrah signed a binding agreement to receive a US$98 million loan from the US Department of Energy to advance work on Vidalia. Yes, Syrah was also selected for a Bipartisan Infrastructure Law Battery Materials Processing and Battery Manufacturing grant of about US$220 million from the DOE to fund some further capital costs for Vidalia. But the latter grant in't a done deal. And the former is a loan that must be repaid with something. The biggest issue for Syrah is scaling its Balama operations to a profitable level. Its weighted average sales price of natural graphite sales for the December quarter was US$716 per tonne. But its average cash costs were US$709 per tonne. That's not good business. Syrah does expect the cash costs to drop significantly, stating in its latest quarterly: "Balama C1 cash cost (FOB Nacala/Pemba) guidance is US$430–480 per tonne at a 20kt per month production rate, assuming a normalisation of diesel price below prevailing levels, the Solar Battery System is operating at full capacity and updated labour costs associated with the renewal of the Company Level Agreement (“CLA”). Balama’s cash costs are expected to reduce further as production rate increases beyond 20kt per month and as improvement initiatives continue to be embedded." But notice the string of conditions. It must hit a 20kt per month production rate. It must see the price of diesel fall. Its solar battery system must operate at full capacity (and bring in the intended efficiencies at full capacity). And its recent labour disputes must resolve themselves. Syrah must do all this while operating a mine in a jurisdiction hit by recent violence and political turmoil.

By Kiryll Prakapenka

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A bad week for graphite stock Syrah Resources

By Kiryll Prakapenka

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