Very Old Article from 2019 but give insight what Australian Super think of Syrah

AustralianSuper stares down shorts on Syrah

Peter KerResources reporter

Dec 3, 2019 – 12.00am

Australia's biggest superannuation fund says the investment thesis that attracted it to Australia's most shorted stock remains intact, in a major vote of confidence for struggling graphite producer Syrah Resources.

Syrah shares have fallen by 94 per cent since June 2016 and its ability to outlast rival graphite producers through this year's downturn is largely due to support from AustralianSuper, which owns 16.5 per cent of the company and has acted as its underwriter and lender.

A severe slump in graphite prices forced Syrah to dramatically scale back production at its Balama mine in Mozambique in October, but AustralianSuper portfolio manager Luke Smith said he still believed Balama would be among the world's biggest, best and lowest-cost graphite mines.

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''It is very much the philosophy we take in our junior mining investments, we invest and support with new capital should the investment thesis be intact, and we continue to see the [Balama] asset as being a very strategic asset. It is a world class resource, it is a world class facility they have now built at Balama,'' he told The Australian Financial Review.

''When it is at nameplate capacity it will be the most globally competitive graphite producer and therefore, over time, as the market starts to shift with electric vehicles, it will be a very strategic asset which we can see can have sustainable cash flow over a very long period.

Related Quotes

SYRSyrah Resources

$0.435

2.35%

1 year1 day

Jan 23Jul 23Jan 240.0001.3002.600

Updated: Jan 19, 2024 – 10.53am. Data is 20 mins delayed.

View SYR related articles

AMNAgrimin Limited

$0.235 -4.08%

Jan 23Aug 23Jan 240.1600.2400.320

HFRHighfield Resources

$0.350 16.67%

Jan 23Jul 23Jan 240.2300.4600.690

''The thing that has changed is price for the commodity they are selling - we look through that."

Firm support

AustralianSuper's continued support for Syrah comes despite the miner raising funds from shareholders on five occasions in the past four years, and as 17 per cent of the Syrah register is betting on further falls in the share price.

While it paid as much as $6.54 for Syrah shares in 2016, Bloomberg data suggests AustralianSuper's stake in Syrah was bought at an average price of 73¢.

Syrah was fetching 35¢ on Monday.

The thing that has changed is price for the commodity they are selling - we look through that.

— Luke Smith, AustralianSuper

AustralianSuper deepened its relationship with Syrah in June when, aside from subscribing for more shares, Mr Smith's team loaned money to the graphite miner in the form of a $55.8 million convertible note.

It was the first time AustralianSuper had issued a convertible note to a listed company.

''We are fortunate that we have this ability to take a longer-term view than most investors out there and approach things in a slightly unorthodox way by writing a convertible note for an asset such as this,'' said Mr Smith.

''We want to continue to back the asset, however we want to protect members' money on the downside, and this is one way we can continue to invest in the asset, provide some level of financial security to the investment we have and also help the management team get through the working capital position over the next 12 to 24 months.

''It shows our long-term nature; it is a five-year convertible period, we can't convert to shares in the first two-and-a-half years, the company can capitalise all interest.''

AustralianSuper's support for Syrah has earned it a right to a board seat, but Mr Smith said his fund was not pushing a board member on to Syrah, preferring to allow Syrah chairman Jim Askew to have the final say.

New entrant

The graphite sector's woes are analogous to those affecting other battery minerals such as lithium; high prices in recent years incentivised new supply to enter and subsequently overwhelm a small market at precisely the time demand slumped through changes to electric vehicle subsidies in China.

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Syrah is the biggest new entrant to the graphite market, and would have supplied 40 per cent of the world's graphite in 2019 had it exported the 300,000 tonnes it was promising 14 months ago.

AustralianSuper's support has allowed Syrah chief executive Shaun Verner to tailor supply to demand, rather than maximise production for short-term cash flow requirements.

As a result, Syrah's exports in 2019 are likely to be closer to 162,000 tonnes.

''Our investment in Syrah is clearly not for this month or next month," said Mr Smith. ''We want to make sure the company has the flexibility to manage its entry into the market over the next five to 10 years.''

Mr Smith said the US government's growing focus on strategic minerals augers well for Syrah, which plans to make battery grade spherical graphite at a factory in Louisiana.

But China's shift in 2019 to become a net importer of graphite, rather than a net exporter, was arguably even more exciting for Syrah, which in the past two years has become the first company to ship graphite into China.

''I don't think people are picking up on what is happening in the graphite market at the moment in regards to the imports into China and the exports out of China and how clearly Syrah is having a massive effect on the market,'' said Mr Smith.

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''It is the first time a large graphite processing plant of this scale has been built outside of China ... it is not like building a gold mine in Western Australia, this is not something you take off the shelf.''

Bigger exposure

Syrah is just one of the stocks through which AustralianSuper has sought exposure to the boom in modern batteries, electric vehicles and energy storage more generally.

Mr Smith's small caps fund has stakes in lithium plays Orocobre and Piedmont, and also owns 8.6 per cent of CleanTeq, which aspires to develop a nickel and cobalt project in NSW.

''We have a view on the electric vehicle and energy storage thematic, it is a global thematic, and it is one that is appropriate for our style of investing,'' he said.

''Share prices will go up and down in a 12 month period, but the thematic is a decade-plus long thematic, which will play out over a significant amount of time and it is one where we continue to do a lot of research".

Mr Smith said his team were also focused on the long-term thematic around food security, and had sought exposure to that trend through a 5.1 per cent stake in Spain-focused potash producer Highfield Resources and a 12.8 per cent stake in Australian potash producer Agrimin.

''We don't invest in leverage plays or higher cost producers, we invest in assets which we can see will be able to survive and make cash flow profits during any stage of the cycle, and that is what we see in the likes of Agrimin and Highfield,'' he said.