SRHYY - Syrah Resources: Strong Upside Remains And Shares Are Even Cheaper

2023-07-21 03:38:07 ET

Summary

• Syrah Resources has received a 'Buy' rating due to its operation of the world's largest graphite mine and plans to supply Active Anode Material to the electric vehicle battery global market.
• Shares are currently cheaper than before, likely due to fears that electric vehicle sales could slow down due to the end of subsidies in China and a potential recession in Western countries.
• Syrah Resources is also expanding its active anode material production facility in Louisiana, further increasing its growth potential.

A Buy Rating for Syrah Resources Limited

This analysis changes from the 'Hold' rating in the previous article to a 'Buy' rating for Syrah Resources Limited (SYAAF).

In addition to operating the world's largest graphite mine (a key enabler for the energy transition) and planning to become a supplier of Active Anode Material [AAM] to major players in the electric vehicle battery global market - aspects already highlighted in the previous article - the shares are now even cheaper.

Why Graphite Is Meeting the Expectations of a Fast-Growing Global Market

According to John Nairn , senior adviser on extreme heat at the United Nations World Meteorological Organization, the increase in temperature currently affecting countries in the Northern Hemisphere is a phenomenon that will only get stronger, with serious consequences for people's health as well as for people's livelihoods. According to scientists, these extreme weather phenomena are due to a climate change anomaly, which is global warming due to excessive heat storage due to CO2 and other greenhouse gases preventing some of the sun's rays from reflecting off space. Therefore, the solution to the problem of the greenhouse effect is to reduce the amount of CO2 and greenhouse gases in the atmosphere, which can be achieved by phasing out all the most polluting activities and replacing them with cleaner activities.

Those that use the energy produced by burning fossil fuels are among the most polluting activities, as the process releases a lot of CO2 and other pollutants into the atmosphere. Given the size of the global vehicle fleet, exhaust emissions from automobiles and other internal combustion engine vehicles must play a leading role.

Therefore, the replacement of internal combustion engine vehicles with electric vehicles will undoubtedly give a huge boost to the solution of the problem, but also to the growth prospects of certain markets, such as natural graphite-based active anode materials [AAM] for manufacturers of batteries for electric vehicles [EVs].

Indeed, the growth prospects for natural graphite-based AAM are very good, judging by Goldman Sachs Research's estimates of the likely evolution of electric vehicle demand. The analyst estimates that by 2035 at least 50% of all cars sold will be electric and that the positive trend would be greatly amplified by global efforts to combat climate change anomalies.

As such, investors looking for opportunities among US-listed stocks may be interested in companies that serve these markets. Or even better: in companies that can rely on a vertically integrated structure and have fingers in both pies, the extraction of the raw material graphite and the production and delivery of AAM, a basic technology for electric vehicle batteries.

Why Syrah Resources Limited is a Top Stock in the Graphite Mining Industry

The stock in Syrah Resources Limited - a Melbourne, Australia-based explorer and developer of natural graphite properties in Mozambique - may be of interest to investors as the company is involved in the mining of the world's largest graphite mine and the expansion of the AAM production facility in Louisiana, with the second project also showing promising developments.

Also, given the growth potential this stock seems to offer, shares are a lot cheaper today than they were a few months ago, as their price is 60% lower than where they started the year.

The lower price is likely due to fears that electric vehicle sales could lose momentum due to the end of subsidies in China, higher inflation and borrowing costs hurting consumers' spending power, and the risk of a recession in Western economies.

The above factors created strong headwinds for the electric car industry and while there was nothing personal against Syrah Resources Limited, they still resulted in a lower price to capitalize on and add to the position as anticipated in the previous article.

Indeed, after the headwind, this is how the stock looks today, a lot more compelling. Therefore, there is now a Buy recommendation rating for this stock.

Shares of Syrah Resources Limited trade in the US over-the-counter markets under the symbol SYAAF (see first chart below) and under the symbol SRHYY (see second chart below).

Shares of SYAAF traded at $0.5405 per piece as of this writing giving it a market cap of $344.29 million. Shares were at 46.2% discount the middle point of $1.17 of the 52-week range of $0.52 to $1.82.

Shares are trading far below the 200-day simple moving average value of $1.16, significantly below the 100-day simple moving average value of $0.8411, and almost on par with the 50-day simple moving average value of $0.6129.

Shares of SRHYY traded at $0.5592 per piece as of this writing giving it a market cap of $344.29 million. Shares were at a 44.7% discount compared to the middle point of $1.25 of the 52-week range of $0.50 to $2.

Shares are trading far below the 200-day simple moving average value of $1.15, significantly below the 100-day simple moving average value of $0.8772, and almost on par with the 50-day simple moving average value of $0.6303.

Given the current economic cycle, where the possibility of even tighter monetary policy following ten consecutive aggressive rate hikes through May 2023 could set the stage for recessionary headwinds, lower price levels for SYAAF and SRHYY shares cannot be ruled out.

As if that weren't enough, the following two charts, which plot the trends of 14-day relative strength indicators ((RSI)) for SYAAF and SRHYY stocks, suggest that there is room for further downside potential to unfold, particularly for SRHYY, despite this stock has significantly fewer trading volumes.

The following RSI chart for SYAAF suggests that the stock is yet oversold despite the year-to-date tumble.

The following RSI chart for SRHYY suggests that the stock is still far from oversold levels despite the year-to-date tumble.

Based on a 24-month beta of 1.68x for both stocks (scroll down to the Risk section on this page and this page ), recession-related headwinds and/or the fallout from a possible two more rate hikes by the end of 2023 could push shares further down.

However, as economists today seem much more optimistic about a soft landing for the economy (i.e., avoiding a dramatic economic slowdown but allowing inflation to return to the 2% target), investors would be better off hoping for a renewed price decline but rather benefit from the current prices.

For now, the cycle means a Goldilocks economy, a period of full employment coupled with economic stability and steady growth as Investopedia defines it, rather than the recession many predicted last year at this point of the fight against inflation.

A soft landing would reignite investor enthusiasm and potentially trigger a shift to bullish sentiment, while the 60% year-to-date decline would offer a good margin of safety. Assuming the investor really needs a margin of safety as given the future prospects the stock price has the potential to trade several times above current levels.

Syrah Resources Operates the Balama Project in Mozambique: the Largest Graphite Deposit Ever Discovered

The Balama graphite mine is located in Cabo Delgado province, Mozambique, and Roadlab - an independent South African provider of professional materials laboratory services - ranks the mineral asset as "the largest graphite deposit ever discovered" after critical examination of the Mozambique mine property.

In the second quarter of 2023 , Balama produced 15,000 tons of natural graphite, a 66% year-on-year decline as the company halted production in May and June due to the uncertain situation in China's AAM market and AAM inventory overhang. The cash cost was $560 per ton of graphite. The company shipped 17,000 tons (of which 2,000 tons were shipped to Vidalia in Louisiana), down 61.4% year over year, at an average sales price of $688 per ton (4% higher year over year).

It is very difficult to predict when the demand for Syrah Resources' production of natural graphite will improve as the international situation appears rather volatile at the moment. With this in mind, the company has revised its way of working at the factory to better meet today's challenges as follows:

• Average monthly production of 10,000 tons of natural graphite at a cash cost of $580 to $620 per ton, with the lower limit of this range achievable if diesel prices normalize compared to the prevailing historical trend.
• Balama is also able to quickly return to higher rates of capacity utilization if the market balances and the demand for natural graphite improves significantly. Should this be the case the company can produce 20,000 tons of graphite monthly implying a cash cost of $378-426 per ton. The lower limit of this cost range is achievable as diesel prices calm down.
• Mid-term, Balama is expected to produce 20,000 tons of graphite per month at a cash cost of $430 to 480 per ton. The lower end of the cost range is reached assuming diesel prices have normalized, and the solar power generator is running at full capacity.

Commercial operation of the solar power generator is expected to be completed in August 2023. The solar power generator will be used under an operating lease for the first 10 years and thereafter transferred to Syrah at no cost. The plant is expected to provide approximately 35% of the Balama site's electricity needs, thereby reducing diesel consumption and resulting in associated cost savings.

Syrah Resources is warming up its muscles in anticipation of busy times as global demand for graphite is set to increase at an astounding rate.

The expected deficit between supply and demand for natural graphite - as illustrated in the following chart from Benchmark Mineral Intelligence as of June 2023 (see slide page 9 of Syrah Resources Limited Quarterly Activity Report Q2 2023) - implies astonishing growth opportunities for Syrah Resources to capitalize on through its production in Mozambique.

Rapid growth in electric car sales volume (by 2035 at the latest, half of all cars sold will be electric vehicles) supports estimates of stronger graphite demand growth, outpacing supply growth by four times, resulting in a deficit that will be compensated over time.

To this growth scenario, the Balama Graphite Mine operation responds with more than 50 years of mining activity that will be conducted using simple open-pit mining techniques (implying a low strip ratio) to produce 94% to 98% solid carbon graphite.

With regard to the situation in Mozambique and the risk of doing business in that country, this analysis refers to the answer given to charles1222, a reader of the previous article.

The Vidalia Active Anode Material Facility Is in the Expansion Project

The company's goal is to become a vertically integrated supplier of natural graphite-based active anode material to other operators in the EV battery supply chain in the US and Europe, as well as to Original Equipment Manufacturer [OEM] customers.

In Vidalia (Louisiana), Syrah is building a large-scale plant capable of producing 11,250 tons of AAM per year. Construction of this facility should be in its final stages and production is expected to start in the final quarter of 2023. Most of the production will be to supply an integrated Tier 1 battery manufacturer and automotive OEMs.

A definitive feasibility study is also ongoing to expand the Vidalia facility in Louisiana to 45,000 tons of active anode material per year. Vidalia will supply active anode material [AAM] under a series of long-term purchase agreements, and there are strong expectations that Vidalia can produce AAM for 2.3 million EVs by 2040.

Therefore, Syrah Resources Limited has entered into an off-take agreement with Tesla, Inc. ( TSLA ) for 8,000 tons of AAM per year from the Vidalia plant with an annual capacity of 11,250 tons, and is also working on an additional 17,000 tons of AAM per year, bringing the total amount of AAM to 25,000 tons per year to be supplied to Tesla from 45,000 tons of AAM per year Vidalia expanded facility.

Syrah Resources Limited is exploring strategic arrangements with Ford Motor Company ( F ) and South Korean electric vehicle battery manufacturer SK On, Ltd. to supply these companies from the 11,250-ton Vidalia plant. Syrah, Ford, and SK On jointly plan to enter into a binding off-take agreement prior to 2028 for the supply of AAM by Vidalia as part of the expansion of the plant.

Syrah Resources Limited is also working with LG Energy Solution, Ltd., a South Korean global energy solutions provider, on a binding off-take agreement to supply every year about 2,000 tons of natural graphite-based AAM from Vidalia beginning in 2025.

Vidalia's initial expansion will be funded entirely with loan capital it has received from the US Department of Energy and Australian Super Convertible Bonds. In addition, the company received a $102 million loan with binding terms from the US Department of Energy last year to financially support Vidalia's expansion.

The balance sheet is characterized by an Altman Z-Score of 2.91 (scroll down to the Risk section on this page and this page ) which indicates gray areas, meaning that the risk that the company could go bankrupt, although small, is there.

The Altman Z-Score measures the likelihood that a company will face bankruptcy problems, depending on the value it takes on. If the value is less than or equal to 1.8, the balance sheet is in distress zones, which means a high probability of bankruptcy within a few years. When the ratio is between 1.8 and 3, the balance sheet is in a gray area, which still implies a risk of bankruptcy, albeit moderate. While a score of 3 or higher means that the risk of financial insolvency is extremely low or non-existent.

Conclusion

Syrah Resources Limited has a bright future as this company aims to become a vertically integrated organization supplying the global market with graphite produced from the world's largest mine in Mozambique while an active anode material production facility in Louisiana will supply key players in global EV battery markets.

Graphite production and sales activities did not perform well in the second quarter of 2023 for reasons not related to the company, but rather for market or macroeconomic reasons.

While these headwinds will pass, the second quarter of 2023 provided the company with an opportunity to review several options to make its operating activities more efficient and start to capitalize on robust demand for natural graphite again as the situation improves.

Natural graphite-based AAM for electric vehicle ((EV)) battery manufacturers is a market with impressive growth prospects. Goldman Sachs Research predicts that by 2035, 50% of all vehicles sold will need to be electric vehicles.

Vidalia will supply AAM to key market players under a series of long-term purchase agreements and there are strong expectations that by 2040 Vidalia will be able to produce AAM for 2.3 million electric vehicles.

Shares have fallen sharply since the start of the year on fears that electric vehicle sales could lose momentum due to the end of subsidies in China, falling consumer spending power, and the threat of a recession in Western economies.

For further details see: