Large houses now positive on SYRAH

Investment thesis: Last year VW announced plans to achieve EV sales at 25% of total sales by 2025. More recently Volvo announced they will move to 100% EV or hybrid by 2020, showing VW are not alone among the world’s major auto manufacturers in planning to dramatically scale up their EV production to compete with the likes of Tesla. Meanwhile on the demand side multiple countries are making moves to limit internal combustion engine cars with the U.K. and France already saying they will ban new petrol and diesel cars from 2040 and China studying when to introduce a similar ban while targeting 20% electric and plug-in hybrid car sales by 2025. Graphite comprises the anode in Lithium ion batteries, used in all EVs. We estimate that if the world matched VWs plans a total of 5.1mt of flake graphite would be required. This does not incorporate any additional demand that could come from home and business battery storage units. For context total flake production (including all uses of natural graphite) is currently under 1mtpa, and we estimate that current total production of battery grade natural graphite sits at around 100ktpa. SYR presents the only major and viable option for increased natural graphite production at the scales required from their Balama mine in Mozambique. Inferred resource for the project is 1.15bnt at a grade of 10.2%. Near zero strip ratio means almost no operating expenditure moving waste. SYRs total cost of production sits a $386/t. Average selling prices for natural graphite are currently between $600-$1000/t. First production commences October 2017 with annual full year production planned at 350ktpa. SYR is fully funded through to first production. 100% of first year production is already contracted. Further upside from downstream processing of battery grade graphite (turning flake into spherical) at a Louisiana site and/or with JV partners in China across 2018/19. We assume that SYR peak at 80ktpa of spherical graphite production in 2020, sufficient to support production of 1.1M EVs per year or a penetration rate of just 1%. A 70% risk weight on the Louisiana downstream project can be expected to roll off in time as debt funding is secured. It is not clear where VW/Tesla or any other EV producers will be able to source the needed quantity and quality of anode material especially given the rising cost of synthetic graphite and its primary inputs. Our pricing assumptions remain conservative at US$690-793/t for flake, $3k/t for processed spherical graphite (in line with lower quality Chinese uncoated natural product) and US$7k/t for coated (versus market prices at $7-10k/t). Valuation $7.45, OUTPERFORM.