Can Syrah's short-term pain become long-term gain? It all seemed...

Can Syrah's short-term pain become long-term gain?

It all seemed so easy for Syrah Resources in the latter months of 2017.
Prices for graphite were rising as the company ticked off a series of operational and permitting milestones at its Balama mine in Mozambique, and simultaneous bull markets for resources and battery-themed stocks saw shares in the company rise 96 per cent in the final four months of the year.
But the first nine weeks of 2018 have been a stinker for Syrah, as setbacks with equipment and planning approvals combined with unexpected doubts about the sort of prices the company would receive for its product.
Syrah's plan to build a graphite beneficiation plant at Port Manchac in Louisiana was rejected on January 10, leaving the company searching for a new location in the US state.
That was viewed as a minor setback, but the market appeared to lose confidence on January 30 when Syrah disclosed that prices received for its initial graphite shipments were lower than the sorts of graphite prices publicised by index providers.
The bearish mood was exacerbated in recent days when Syrah revealed damage to its new processing kit at Balama, which was expected to reduce graphite production for eight weeks while repairs are undertaken.
Those factors combined to wipe 32 per cent off the value of Syrah shares since January 5, and the company continues to be the most shorted stock on the ASX, with more than 22 per cent of its register effectively betting the share price will fall.
Graphite is a small and very opaque industry with different prices for different product specifications, and Syrah's pricing issue appears to have shaken expectations that Syrah's product would achieve a premium to the publicly quoted prices given its higher than average carbon content.
Roskill senior analyst Suzanne Shaw said fine to medium-size graphite flakes with carbon content between 94 per cent and 97 per cent were currently fetching just under $US1000 a tonne.

Roskill expects that price to rise to $US1200 or $US1300 a tonne by 2020.
Ms Shaw said it was not a major surprise, nor a major concern, that Syrah's initial shipments did not achieve the publicly quoted prices for graphite, given the need for customers to get used to the precise specifications produced by a graphite miner.
"They need to work with the battery companies, they need to develop a product they know will be consistent in purity and then you can get a good price," she said.
"Unless you have deals with battery producers it is very hard to sell off the shelf."

Syrah is selling to both the traditional (refractories) and the new (batteries) markets for graphite, and Ms Shaw said the company's offtake agreement with Chinese battery anode producer BTR New Energy Materials was significant.
Under that deal, Syrah's graphite would be beneficiated by BTR into the sorts of battery grade products that command significant price premiums.
Such premiums are the reason Syrah wants to develop a beneficiation plant in Louisiana, and Ms Shaw said it was unclear whether Chinese consumers saw Syrah as a supplier or a future rival given its Louisiana plans.
"They are the first people to be exporting into China and that is still a very new and exciting boundary that has been crossed, but there is still a question as to what happens in the future, will the Chinese take more from Syrah in the future, or maybe they are concerned Syrah will make its own production and be a competitor," she said.

Few things attract short-sellers like suspicions a company may need to raise cash. On that front, Syrah timed its run well, raising $110 million during the bull market of September and October 2017.
Syrah had $US112 million of cash at December 31, and expects to Balama to be cash flow positive by July or August.
The company still expects to spend $40 million building its Louisiana beneficiation plant, but even allowing for that and the weaker than expected received prices on Syrah's initial exports, Credit Suisse analyst Michael Slifirski believes the company is not likely to require another equity raising any time soon.
"In terms of their available liquidity it is absolutely plentiful," he said.

"It is very hard to see a situation where a modest discount compared to a perceived basket average price would see them consume all their cash reserves."
Mr Slifirski has a target price of $6.60 on Syrah shares, and says the company's long-term prospects remained strong despite the recent run of bad news, with graphite demand set to rise strongly even if electric vehicle uptake is modest.
"On one hand you have a macro story which is immensely exciting; they are in production with a near infinite resource of extreme quality and there are no fast followers, but near term they have got a few commissioning challenges and we are worrying about the pricing of an initial 3000 tonnes of commissioning production in a market that is 600,000 [tonnes] and going to a million [tonnes] near term," he said.
"Ultimately they will be the lowest cost producer, they have got an infinite scale opportunity so they will be the market."
Ms Shaw agrees that if Syrah can sort out its operational and planning issues, it has the potential to supply all the graphite the market needs for the forseeable future.
"If Syrah can bring on everything it says it will then that should be enough to meet the market."