CS are renowned for their careful, conservative analysis. Sometimes key facts are so politely put that the message does not really show through. But in the latest CS report on Syrah, Michael Slifirski, one of Australia's most highly regarded minerals industry analysts, does not hold back. If anybody wants to know where the graphite mining business is going, they can't afford to not read what he says.
I can only touch on a few of the points he covers, but they may give some indication of just how he lifts the lid.
1. The Risk Level for Balama has dropped.
The project is 42% complete, is fully funded and fully permitted. The claims of a tense Mozambique security situation are "uninformed and unsubstantiated", with intermittent disturbance confined to the Renamo opposition support area in the centre of the country.
2. Silicon as a major rival is a non-starter.
Small amounts of silicon have long been used in anodes. But, despite hundreds of person-years of work, all-silicon anodes swell and contract so much during charge-discharge that the batteries have a quite unacceptably short life. Benchmark Minerals projects no significant change from graphite anodes for ten years, if ever.
3. Premium coated spherical graphite demand is strong
Syrah's product has been extensively tested and end-user qualified. It ranks as a premium product. Syrah's spherical graphite pilot plant has demonstrated high yields, using fine-flake graphite feed.
4. What if graphite prices fall?
Balama is at the bottom of the cost curve. For an additional capex of US$80-100m, they could double production. This is a far lower capital intensity than any of the competition. The result would be that SYR would be profitable, while existing producers were "driven to insolvency", and "unfunded aspirational producers" (like that phrase?) shelved plans for operation.
5. Basic economics
For all resources, grade, and strip ratios, are the key. On these criteria, compared to any realistic-sized competitor, Balama is way out in front. And how about this line? (I had to read it a couple of times)
"Assuming historically elevated prices to underpin a project decision and deliver a flawed investment of shareholder capital is a sound footing for failure".
6. Barriers to entry
First mover advantage makes things much harder for "materially lower grade, high-cost followers". SYR's very large production capacity, and proven product credentials, will increase the barriers for "lower grade explorers aspiring to be producers. This second tier group appears dependent on an assumed basket price of up to three times that which the market is assuming for SYR".
7. Balama status
There is no question of the strategic value of controlling the world's largest, high grade, fully permitted, advanced construction, graphite project.
8. Need for reliable supply from outside China
There is a risk that China could restrict exports, thus starving the ex-China market.
9. Purity requirements for Battery graphite
There are increasing quality concerns over Chinese supply, brought to a head by the recent Samsung phone battery fires. Those batteries were apparently made from blended product, from multiple mines, significantly increasing risk of contaminants which, even in minor traces, can cause issues. This has now reached the point where end-users outside China are demanding, as an absolute requirement, that spheroidal graphite for batteries must be chemically purified.
There is much more to read in this excellent, and refreshingly frank, report. Credit Suisse, Michael Slifirski, and Nick Herbert, who also was involved in the report production, are all to be congratulated on producing a wealth of information, putting it into half-a-dozen pages, and, above all, for telling it like it is.
Cheers,
Prime1
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