Graphite to surge, Syrah and Talga the best bet for investors: UBS

Elouise FowlerOct 1, 2023 – 5.37pm

Shaun Verner is the chief executive of Syrah Resources. Luis Enrique Ascuinone

Syrah Resources, the ASX-listed graphite producer, is set for a moment in the sun with demand for the key battery material expected to send spot prices up by more than 50 per cent, according to brokers at UBS.

Stock in Syrah surged nearly 15 per cent following the publication of the investment bank’s analysis on Friday, which estimates electric vehicle automakers will adopt cheaper lithium iron phosphate batteries.

Shaun Verner is the chief executive of Syrah Resources. Luis Enrique Ascuinone

LFP batteries, which requires large amounts of graphite, are a form of lithium-ion battery. This type of battery is not as robust – it requires more frequent charging – but UBS expects automakers will look past this to embrace its cheaper cost and lower carbon profile.

Syrah is the largest vertically integrated graphite producer outside China.

Lachlan Shaw, the lead author of the research, forecasts natural graphite prices will fetch $US850 per tonne by the end of the decade, due to a six-fold increase in demand to 6.3 million tonnes by 2030. That’s a 50 per cent recovery from the $US570 per tonne spot price on Friday.

“We think that the market is more focused on spot graphite prices which are down 30 per cent from 2022 highs versus the potential upside ahead from continued EV momentum and potentially increasing natural graphite share,” he wrote in a note to his clients.

UBS anticipates Syrah, which owns the Balama mine in Mozambique, is well-placed, alongside Talga Resources, a pre-revenue explorer hoping to build a graphite mine and battery processing facility in Sweden. “In natural graphite we marginally prefer ASX-listed Talga over Syrah. In a quickly growing market this isn’t a zero-sum game,” Mr Shaw said.

Graphite is one of 50 minerals listed by the United States as being critical to national security and economic growth. The US and its allies are seeking to break from China’s dominance over critical minerals, which are crucial for electronics and defence applications including weapons systems. China supplies about 85 per cent of the world’s battery-grade graphite.

“The extent of substitution with synthetic graphite, where China is dominant, remains the key debate and makes a scarcity pricing moment (like lithium in 2021/22) unlikely,” Mr Shaw observed.

“But supply chain localisation makes our expectation of growing [supply] deficits by 2030 in both synthetic and natural graphite feasible.”

Syrah, AustralianSuper’s preferred battery minerals miner, offers one of the few options outside of China for those seeking the material.

The strategic importance of the company to the US was revealed this year when the Biden Administration awarded it a loan of $US107 million ($145 million). Syrah plans to use it to more than double the size of its graphite processing plant at Vidalia, in the state of Louisiana.

Syrah has faced strong set-backs this year, halting production in April when graphite prices plummeted due to high inventory in China and weaker sales growth for electric vehicles. Syrah’s shares are down 74.63 per cent from $2.01 since the start of the year.

Syrah’s chief executive Shaun Verner told The Australian Financial Review that operating cost per tonne in “campaign mode” – where it continues to mine and stockpile rather than sell output – was approximately $600 per tonne.

“That cost decreas[es] to below $400 per tonne once Balama operates at full capacity... Reset shipping costs and increasing production costs in China are improving our competitiveness in supply,” he said.

Syrah disclosed last month in its full-year results it had not sold any graphite to customers in May or June.

“A return to continuous operation at Balama will be dependent on consistent demand improvement,” Mr Verner said on Sunday.

Talga’s share rose 1.27 per cent to $1.20 on Friday. The explorer is aiming to develop a vertically integrated battery facility in Sweden, which will process output from its proposed nearby mine in the country’s north.

“We like Talga due to its geographical proximity to Europe’s high growth, emerging battery and EV supply chain as well as the continent’s building support for the regionalisation of critical supply chains,” Mr Shaw said.