Investing

Syrah Resources (ASX:SYR): World’s Largest Graphite Producer In Trouble

Syrah Resources (ASX:SYR) has been in major cash troubles due to falling demand out of China. Combined with high Chinese graphite exports the recent years this has resulted in a huge drop in graphite prices, hurting Syrah Resources and its stock. However Syrah Resources is an essential non-Chinese miner for our road to sustainability.

Syrah Resources (ASX:SYR) mines graphite flakes in Mozambique, processes the graphite in the USA and its headquarters are located in Australia, the perfect example of a vertically operating company. However due to falling graphite prices Syrah’s business has been hurt significantly. This resulted in the decision to lower production at their Balama Mine in Mozambique in Q4 of 2019. In order to remain competitive Syrah has cut 30 percent of the jobs at their Balama graphite mine. This was a direct result of falling demand out of China due to cuts in Chinese EV subsidies. Add the current global COVID-19 lockdown and Syrah’s whole business model is crushed. Under the corona outbreak Syrah Resources had to temporarily close down its Balama Graphite mine in Mozambique, the same applies to their Battery Anode Material project in Vidalia, Louisiana. They already faced huge liquidity problems and now have even less time to recover and restructure in order to survive. Under current circumstances Syrah is only able to survive one more year until it defaults on its outstanding notes. All this is hurting, but luckily Syrah got extreme support last June from AustralianSuper, the biggest Australian pension fund, this fund doubled down on Syrah with a new loan and subscribed to even more shares in Syrah Resources.

Short Sellers Taking Profits

In the picture below we can see the percentage of Syrah Resources (ASX:SYR) which are shorted. Before the corona outbreak Syrah was one of the most shorted stocks on the Australian Securities Exchange, at the time of writing this has dropped to a percentage of 6.25%. This can mean several things, but one thing is sure: short sellers took their profits in recent weeks. Probably this means that Syrah stock won’t dive further on the short term, while China is starting up again graphite prices have somewhat recovered last week. The Golden Investor expects graphite prices to slowly get back at the recent levels. However due to the cash troubles a downward pressure by short sellers and upward resistance is very likely on the short term. This makes investing in Syrah Resources (ASX:SYR) stock also risky on the short term.

Figure 1 – Percentage of Syrah Resources Stock Shorted

Short Term Trouble Can Turn Into Exponential Long Term Gains

The future for Syrah looks grim, but as we can see short sellers think rock bottom is reached, partly because lately graphite prices are on the rise again after a big drop due to the Chinese lockdown. But still, according to a Bloomberg report, EV sales will rise significantly the coming decades, this will result in increased graphite demand and prices (see figure 2). Further sustainable developments are all dependent on battery capacities and energy storage. The main problem with almost all environmentally green sources of energy such as solar energy is that the influx of electricity is very fluctuating over time, so large energy storage is necessary to be able to dose the energy over time. This leads to growing demand for large batteries, especially the demand for large end extra large graphite flakes will drive increase the coming decade which will lead to a rise in prices. In addition to this China is more and more determined to scale down their mining activities due to environmental harm after their exponential up-rise last decade.

Figure 2 – EV Vehicle Sales Forecast

Comparison with Lynas Corporation: Same Long Term Catalyst, But Higher Risk

The above discussed drivers of future growth all seem similar to our Lynas Stock Analysis. And while graphite is on the essential materials list issued by the US and Syrah’s Battery Annode Factory seems as an essential element for US supply of so important domestic supply of batteries. The question remains if the US and Australia will let this essential supplier default or if Syrah will default on its notes. Personally The Golden Investor thinks Syrah is extremely cheap at current prices, such a well developed company which is fully non-dependent of China is extremely valuable to the western world. At the current market cap of one hundred million dollars it seems as if some sort of governmental help could drag Syrah through this difficult time and possibly help the company grow to new all-time highs. If prices will grow again to the 2018 levels, Syrah has an upside of 2000%, and looking at the future growth of EV sales this is likely to happen, however the question remains if this struggling company will be able to survive on the short term.

Lynas has the luck that the price of rare-earths have been relatively good, even under current circumstances, so it is very likely Lynas will survive. This certainty is partly due to their extremely good cash position and a possible great US supply deal ahead. The Golden Investor is bullish on Lynas stock, because on the long term Lynas will get back to their pre-covid levels and grow in healthy way from there. Most investors seem to agree with this view since Lynas stock already up 40 percent from corona-lows, further recovery is only a matter of time. This is the main difference with Syrah’s outlook, the short term outlook for Syrah could not be worse, corona is another major hit for Syrah in their battle for survival. The question is if this blow results in a K.O. or if this will turn into a last round win for Syrah Resources.

Disclaimer: The writer of this article doesn’t hold Syrah Resources (ASX:SYR) stock, this article should not be interpreted as investment advice or anything like that.

Bibliography

1) https://www.shortman.com.au/stock?q=syr

2) https://about.bnef.com/electric-vehicle-outlook/

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