Macquarie Bank Research - SYR & KNL

Mac Bank (or more correctly, Macquarie Wealth Management) have released a buy (outperform) recommendation today on SYR. I'm not going to post the full note as I received it second hand and may not be for public consumption (until SYR possibly posts it on their website), but I wanted to make a point about the report, and highlight their mention of KNL (which is not covered by MacBank, although is mentioned).

Lest anyone get confused, I'm not cross-promoting SYR. I have mentioned numerous times my own view on their investment credentials (or lack thereof), and nor would I be so obvious and stupid (or deviously manipulative) to "pretend" to dislike SYR's metrics while actually secretly wanting you to buy them. My interest here is 1. Macbank's valuation method, and 2. their significant point about KNL.

1. MacBank has an outperform on SYR, with a share target of $5.30. That's a fairly substantial jump from today's sp, although well below it's recent highs. What is interesting is their sum of the parts valuation. It is as follows:

Balama graphite $1.90
Spherical project $2.53
Undeveloped Resources $0.34
Unpaid capital $0.02
Corporate/forwards   ($0.26)
Net cash $0.80
Net Equity Value @ 12 WACC $5.33

My point here is that their future price growth targets are almost solely reliant upon the "Spherical project" kicking massive goals in order to drive the value for SYR shareholders.

2. MacBank's exact words as follows (but I've underlined for effect):  

"Of the many mooted graphite development projects, we believe there two spherical graphite projects that can partially address the supply gap: SYR’s Balama spherical project and Kibaran’s (KNL AU, Not Rated) Epanko and Merelani-Arush projects in Tanzania. SYR is targeting annual production of 25,000t of spherical products and KNL envisages a more modest start up of 15,000t ramping up to 50,000t should demand support an expansion. We assume that both these will come into production."

That MacBank (or anyone) is covering SYR is to be expected. They are large enough to be in a couple of indexes on the ASX, and therefore attract a lot more broker reports by necessity. Also, they have raised $211m in cash, so irrespective of what you (or I) believe about the quality of their graphite, they are definitely going to be in production. Whether they can sell is another issue, and one that MacBank highlights as a risk, but the fact their mine will be built should not be in any doubt.

What I find interesting is that when SYR are put to one side, and MacBank assess all the other potential spherical graphite projects, the only other likely company they state in their analysis as likely to get into production is KNL. For the sake of avoiding confusion, I add that "spherical graphite" project is different to a "graphite mine", and MacBank are not casting judgement on whether another "generic" mine gets made or not. KNL has released it's own ASX announcement on their potential with regards to a spherical graphite project, and one which is not yet factored into our own valuations. SYR has a MacBank valuation of $2.53 for it's spherical graphite plant, initially at 25 ktpa. By contrast, KNL's initial study was at 15 ktpa. But on MacBank metrics, that's up to $1.50 per share valuation for KNL for it's spherical plant. Of course, applying those same metrics would result in a slightly lower valuation for KNL, due to SYR having lower opex costs, but when your margin is in the $thousands per tonne for spherical graphite, then additional opex of $260 per tonne is not a major concern (again, I stress, for a spherical operation, not a general graphite mine).

So KNL has an extremely viable mine based on today's committed industrial demand, and the added huge potential upside from a spherical plant targeting the battery future. Add MacBank's valuation metrics for a spherical plant with our $200m NPV for the graphite mine, and our "sum of the parts" valuation is likely to be well over a few $dollars per share.  And only one graphite company has binding/committed buyers backed by an (in principle) sovereign government guarantee. Not bad for a share that you can still buy under 20c (with the caveat being that you can't buy any significant volume under 20c, it's only rats and mices playing).