Graphite producer Syrah Resources [ASX:SYR] announced a security incident took place 200 km from its Balama project in the Cabo Delgado province of Mozambique.
SYR shares fell as much as 15% on the news.
Syrah wasn’t the only graphite miner impacted by what it described as an insurgent attack.
Triton Minerals [ASX:TON] entered a trading halt pending a further announcement relating to the incident at Ancuabe.
Syrah and Triton have both slumped in recent months, down more than 25% year to date:
Source: Tradingview.com
Mozambique security incident
Today Syrah announced it received reports of an ‘insurgent attack’ at a mine project site near Ancuabe, about 200 km from Balama in the Cabo Delgado province.
Syrah noted this was the second confirmed attack in the Ancuabe region in recent days.
While the attack happened 200 km away from SYR’s Balama site, it did occur 30–40 km from the N1 road, the primary transport route between Balama, Nacala, and Pemba.
As a result, both Syrah and its logistics service provider have taken precautionary steps and suspended all personnel and logistics movements along the N1 route ‘until further information is available’.
Importantly, Syrah said that — so far — Balama mining and processing operations aren’t impacted.
Syrah commented:
‘Syrah’s highest priority is the health and safety of employees and contractors. Accordingly, the Company retains close contact with Government, security authorities and other stakeholders to monitor the situation and assess the safe resumption of transport operations.
‘Syrah will continue to update the market on the security situation and any impacts on Balama operations.’
Syrah’s known sovereign risk
SYR has flagged risks of this nature often, warning its operations can be affected by political instability in Mozambique.
Here is what Syrah wrote in its FY21 annual report, for instance:
‘Syrah is subject to the risk of, among other things, loss of revenue, property and equipment as a result of expropriation, war, insurrection, civil disturbance, acts of terrorism, geopolitical uncertainty, political/civil unrest, violent criminal acts and displacement of people that has taken place as a result of this activity in the north of Mozambique.
‘While this area of Mozambique is more than 300km from the Balama Graphite Operation and such incidents are currently confined to such parts, there is no certainty that will always be the case.
‘Accordingly, Syrah has significant security measures and protocols in place, however such security measures and protocols does not guarantee that such risks will not arise.’
And in its FY20 annual report, it again pointed to acts of ‘civil disturbance, insurrection, and violent criminal acts’:
‘At this time tQhe majority of such acts have been at least 300km from Balama and have not directly impacted Balama or transport routes for Syrah’s products, however there is no guarantee that such acts will not spread closer to Balama.’
Syrah outlook: Mozambique, sovereign risk, and investment attractiveness
The sharp share price drop reflects the heightened sovereign risk assumed by miners like Syrah and Triton who base their operations in jurisdictions dealing with elevated political instability.
Obviously, miners have an incentive to mitigate those risks.
In 2019, The Africa Report ran a story on foreign investment in Mozambique.
Here is a snippet from the report:
‘“Investors look at the sector or commodity that they are interested in, not just sovereign risk, and then they will take the necessary steps to mitigate against these risks,” says Christopher McKee, chief executive officer at PRS Group, a country risk rating company. “The graphite sector in Mozambique may well succeed.” He adds: “Moreover, it’s like the age-old adage: the safest place to be after a terrorist attack happens is where it occurred, so investors will go back.”’
But what can any one company do to mitigate geopolitical risks? Often, heightened sovereign risk may cause a miner to trade at a discount.
Investors may prefer mining assets in safer jurisdictions.
A well-known source for data on business and sovereign risk relating to mining countries is the Annual Survey of Mining Companies by the Fraser Institute.
The survey has run since 1997, covering nearly 100 jurisdictions around the world by collating responses from industry participants on a jurisdiction’s investment attractiveness.
In its latest survey, released in April 2022, the Fraser Institute dropped its coverage of dozens of countries — including Mozambique — for insufficient participant responses.
The minimum threshold for inclusion was five responses, meaning Mozambique received four or less responses from a total of 290.
The top jurisdiction in the world for investment based on Fraser’s Investment Attractiveness Index was Western Australia, with Saskatchewan second and Nevada third.
Rounding out the top 10 were Alaska, Arizona, Quebec, Idaho, Morocco, Yukon, and South Australia.
SYR share price outlook
Today’s announcement clearly worried investors, with the SYR stock plunging 15% immediately after the update.
Triton’s trading halt will likely add to the uncertainty.
With concrete information hard to gather, investors are largely in the dark about the significance of the security incidents at Ancuabe.
Are the incidents isolated? Are they a precursor for something larger? How will this affect the wider region? And for how long?
At the moment, these questions are almost impossible to answer.
And while Syrah now has to deal with the repercussions of this security issue, its problems don’t end there.
As SYR frequently notes in its annual reports, its Balama project is isolated:
‘Due to the remoteness of Balama, Syrah is subject to an increased number of risks including a lack of access to key infrastructure, security requirements, rising fuel costs, changes to transport route conditions and requirements, unexpected delays and accidents that could, singularly or collectively, materially negatively impact upon Syrah’s financial performance and position.
‘Higher than expected inflation rates generally, or specific to the mining industry in particular, could be expected to increase operating and capital expenditure costs and potentially reduce the value of future project developments.’
The remoteness of Balama — coupled with a global energy crisis — could spell trouble for Syrah’s capital expenditure.
Just yesterday, The Wall Street Journal reported that high fuel prices are hitting Africa hard, stranding truckers and grounding flights.
Syrah said that its Balama project is powered by a 15.4-megawatt diesel power station. The cost of diesel is spiking, with the diesel shortage in Africa becoming quite dire.
All up, it looks like Syrah is set for a challenging end to 2022…despite the broader strength in the graphite theme.
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