18 November 2019
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The New Criterion: Syrah Resources

Tim Boreham
25 June 2017

By Tim Boreham

Syrah Resources (SYR) $2.69

After five years of speculative hype, the ASX-listed graphite sector is about to come of age with sector big daddy - Syrah - poised to start production at its massive Balama mine in Mozambique.

A 1.2 billion tonne deposit, Balama will be the world’s biggest producer of the grey metal that has myriad industrial uses, most notably in lithium-ion batteries (where it forms the anode).

What’s not to like? Well, the fear is that the mine might be just too successful, flooding a market that – while loaded with potential – is still quite small and linked to steel production levels.

As is the norm, Syrah shares have lost value the closer the $US200m fully financed mine gets to production. The shares have lost 60% over the last year, with 18% of the register short sold compared with 4% 12 months ago. That makes Syrah the second biggest shorted stock, behind only lithium-hopeful Orocobre.

It doesn’t help that Viceroy Resources, the mysterious US investment firm that later dumped on the sandalwood stock Quintis, ascribed a 70c ‘target price’ to Syrah in a scathing report last December.

Syrah reports the mine is 80% complete – and it has the aerial pics to prove it – with first production slated for August.

In the first year, Syrah plans to produce 140,000 to 160,000 tonnes of the stuff, rising to 250,000 to 300,000 tonnes in year two.

Put in context, Syrah cites the market for natural graphite last year at 950,000 tonnes, including 650,000t for flake graphite, plus a further 1.4mt million for the synthetic material (made from petroleum coke and tar pitch).

(Other figures put the natural graphite market at 1.2mt for the natural stuff, half of it flake).

On Syrah’s own reckoning, it will have a 40% share of the flake graphite market by 2020, “driven almost solely by batteries for consumer electronics, electric cars and power storage.”

In a recent report on both lithium and graphite, UBS says graphite oversupply concerns are a “legitimate fear”. Synthetic graphite will also service some of the expected increased demand and will “continue to compete on cost and performance.”

But the firm also cautions the potential new supply might be exaggerated, because producing high-quality battery material requires “skillful execution”.

The trouble in appraising the supply-demand outlook is that graphite is a less-than-transparent market and the price received depends on the size and quality of the flake and the end use.

For a while, the graphite players were playing a marketing war based on the size of the flake, with the term ‘jumbo’ and ‘super jumbo’ entering the industry lexicon.

“To a point, size is a furphy, it’s really about purity in the battery market,’’ says one graphite watcher. “When it comes to producing the spherical material (used in batteries), the flake has to be ground down anyway.”

Syrah cites a going rate of $US575-1100/t  for the flake material and $US2800-4000 for the value added spherical stuff. No prizes for guessing what market Syrah is targeting.

At Balama, Syrah enjoys not just a capacious deposit but overall high quality as well. The 114mt of reserves contains 186mt of contained graphite at an average grade of 16.6%, close to double the average grade for current global producers.

Syrah also has no shortage of buyers, having signed an offtake agreement (among others) with the Shenzen-based BTR New Energy Materials, the world’s biggest anode battery maker.

With some finesse, Syrah can use its unusual position of market dominance to avoid a market glut, especially for the lower-grade material. Management is certainly aware of the dangers.

Arguably, the greater risk is for the fast followers with projects at the financing stage.

The sector has already undergone a shakeout, with the opportunists moving on to the next hot story (most likely lithium or cobalt).

As our observer says: ““Everyone jumped on the bandwagon at first but the sheep have well and truly been separated from the goats with only the serious players left.”

The two other advanced ASX plays – Magnis Resources (MNS, 51c) and Kibaran Resources (KNL, 18c) – will be watching the pioneering Syrah with interest.

Kibaran has completed a bankable feasibility study on its Epanko project in Tanzania, predicated on output of 60,000t over an 18-year life.

Also in Tanzania, Magnis is in financing stages for its Nachu project. Costed at $US270m, Nachu has been scoped at a 240,000 tpa producer.

Kibaran and Magnis shares have fallen 30% and 45% respectively over the last year as well.

Traditionally, investors in junior resources prefer the early-stage stories because blue sky is more exciting than the drudgery of actually commissioning a mine. The games of short sellers aside, valuations slide when the first sod is ceremonially turned.

Over the next 12 months, we’ll get some feel for whether Syrah is worth 70c a share, or the $7.45/sh valuation ascribed by Credit Suisse in a report on the stock this week.

The firm, by the way, forecasts Syrah to generate $84m of ebitda in 2017-18, rising to $US249m in 2018-19.

And investors will enjoy more of the goodies because the Mozambique government has dropped plans for a super resource profit tax, a template nicked from Julia (remember her?) Gillard.

Alderan Resources (AL8) 44c

Golden Mile Resources (G88) 18c

We wouldn’t describe demand for new junior resource listings as effervescent, but this duo has made it to the starting line, despite June being more of a time to shed dud scrip rather than take on new speccie plays.

There’s a Syrah segue to Alderan, in that Syrah’s founding chairman, Tom Eadie, is on the board and former Syrah MD Tolga Kumova holds 13% via a family vehicle.

But there’s not a flake of the grey stuff in sight: Alderan’s target is a primarily porphyry copper ground in Utah, which has a rich history of both mining and Mormonism.

Alderan’s Frisco project includes mineralisation of both copper-gold-silver and copper-molybdenum-gold, so there’s a few marketing options there should commodity fashions change.

Golden Mile, meanwhile, is also hedging its bets as a multi-commodity play but its headline investor appeal lies with that other battery ingredient of the moment, cobalt.

“It’s no surprise that when people who have got cobalt in a project then they are talking about cobalt,’’ says CEO Tim Putt.

Strictly speaking, there are few pure-play cobalt deposits globally, with the metal produced as a by-product of copper or nickel production. 

Golden Mile’s Quicksilver nickel-cobalt ground is just down the road from laterite nickel producer Ravensthorpe, which just happens to be the biggest local cobalt producer.

Putt says he was looking at copper-cobalt projects in the Congo in the early 2000s, long before cobalt was sexy. Even then, he says, the cobalt credits were valuable enough to carry many a project.

Golden Mile raised $4.5m at 20c apiece. While oversubscribed, the shares have ebbed below the issue price since listing last Monday.


Not to be confused with the doomed Star Wars planet Alderaan, Alderan raised $8.5m, also at 20c but the stock has more than doubled.

May the force be with you!

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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