Hi guys,
This is my first comment ever on the SYR forum. The person who inspired me to comment here was Mr.
@corza
On another stock that I own, I felt there were certain risks and highlighted them from time to time. I was spot on with my perceived risks but perhaps I should have highlighted them even more, and maybe I should have even followed my own instincts.
Mr. Corza rightly pointed out that if the “mum and dad investors” were fully aware of the risks, they might have escaped earlier, and this obviously applies to all stocks. Taking inspiration from those observations of Mr. Corza, I now find it my duty to fully inform SYR mum and dad investors of all the possible risks, that I'm aware of, and I would not get sound sleep if I don't do so.
I’ll try to make this a comprehensive ongoing series based on the responses and appreciation I get from SYR investors
1) Risk 1 - Grossly overvalued on peer comparison basis
Of the 3 well known ASX super pits, SYR is valued at close to AUD 800 million while the other 2 are valued at AUD 124million and AUD 37 million.
This IMO is one of the biggest risks that SYR is facing. To appreciate the risk, it should be taken in conjunction with other risks like all the ones below
2) SYR has said that it will produce something like
350,000 tonnes for 10 years. However SYR only has offtakes for 80000 tonnes for 3 years. Clearly the risk is very apparent that the market might have mispriced SYR, and not considered this risk
3) Another issue is whether management actually believes that the 350000 tonnes a year will be produced and offtakes will be secured. If offtakes have been secured, then clearly the offtake and other info should be made public so that investors can take appropriate decisions. If not, then
are the continuous disclosure requirements being met? Because it is clear that something does not add up.
4) On the other hand,
is SYR expecting that the 350,000 tonnes a year will not be produced? If so, then that info should have been made available immediately. Market cap could very well crash if SYR is unable to meet its production and offtake goals. How can the market take this seriously when we only have offtakes for 80,000 tonnes?
5) A question then is whether SYR should already be valued as a boutique graphiteer?
Obviously 800 million AUD market cap is just too much for a boutique graphiteer, and even one which has the ability to be a super pit.
6) Is SYR going to go ahead with plant construction? Much has been said of SYR’s cash balance (come at the cost of much destruction to shareholder value) but
is SYR actually going to use that cash balance for plant construction? Not much info has been revealed yet and we keep hearing that SYR has lots of cash on it balance sheet. If SYR does not intend to do anything but keep cash, then clearly the 800 AUD market cap is just too much.
7) If SYR intends to do nothing with the cash, no construction of plant, etc. then it could also imply
lack of direction, which could be a risk going forward. We have so much cash on the balance sheet since then by destroying shareholder wealth but absolutely nothing is being done with that cash
8) Many people believe that
graphite will go into massive oversupply in the coming years. That could realistically happen. Obviously, company with huge market capitalizations could fall very hard
9) SYR shorts have been steadily inceasing. SYR is looking to
be a great shorting target
http://www.shortman.com.au/stock?q=syr
10) Another issue to consider is whether SYR is being
pumped up in an attempt to make it an even better shorting candidate. Some poor mum and dad investors might believe that just because competition is in trouble, SYR is going to rule. The recent share price rise could be a good excuse to lure in many sheep
11) Global macro conditions are getting increasingly weaker. IMO, in the time to come, there are many bubbles due to burst. With
weak macro conditions, overvalued stocks of any sector would come under greater scrutiny
12) Some people believe that
Chinese offtakes are risky and should be given any credibility. I don’t personally agree but am just highlighting the risk in case people want to consider the risk. In any case, SYR needs to demonstrate some
diversification of customers
13) SYR has had a sharp rise over the last few days from 3.05 on 14
th to a close of 3.58 today. In
short term, SYR could very well have some profit booking as investors and traders re-evaluate the risks
14) A well known graphite commenter Ben Kramer Miller has long been critical of SYR and called it his
favourite contrarian idea, long ago. Could he be right?
http://seekingalpha.com/article/3136536-my-favorite-contrarian-idea-short-syrah-resources
15) When I first started my own analysis on the graphite sector, my first analysis on another graphite stock was on March 7, where I’d also pointed out
peer imbalances and how SYR appeared overvalued on peer comparison basis. Last close on March 6 for SYR was 4.72 and SYR has never ever closed over that. On one occasion, it came close but was then promptly hammered back. This level seems like resistance. It is now well over a year since SYR closed about that price.
16) There are so many risks and considering the huge market cap, can one realistically expect much reward? Isn't the
risk-reward ratio too much against SYR?
17) There was an Industrial Minerals analysis of the graphite sector many months back. SYR got a
poor rating on flake distribution of just 6 compared to many ASX companies who got 8 or more. Could this be a risk down the line as some people believe flake distribution is important
18) IM also gave SYR only 6 for purity? Could this be a risk too?
19) SYR does not seem to have any
floor price for its offtakes and if graphite goes into oversupply and price crashes, then this could cause a problem
20) I understand that SYR may have made a major mistake of
tying their own hands up for 3 years and agreeing not to sell to any other customer in China while their offtake is on. Please correct me if my understanding of the situation / terms of MOU is wrong. Obviously, if graphite demand takes up before that, then SYR would lose out, and would definitely not deserve such a high market cap.
21) The current total shipping costs from the Port of Nacala to major regions around the world as mentioned in the SYR DFS in USD are
China – 30-35
Japan – 40-45
Rotterdam – 90-95
New Orleans – 90-110
SYR could lose out badly due to tying up its hands in China due to additional shipping costs and reduced margins, as it
attempts to make up by selling to other parts of the world with higher shipping costs.
22)
SYR does not seem to have any jumbo flake project. This could be an issue going forward as some people believe jumbo flake could be important
23) SYR seems
overly reliant on the battery story. Share price bubble could burst if the battery hype fizzles out.
24) Conclusions
I wish to thank Mr.
@corza for encouraging me to come up with detailed risks for the mum and dad investors, and I'll try to put up a better effort on this front in future, starting with the SYR forum.
Many SYR investors might want to thank me and if so, then please remember to thank Mr. Corza first.
Keep in mind that share price could go up more as bubbles typically inflate to the point where they are finally too large to sustain. Hard to tell whether or not that point is reached but I’ll be keeping watch, and will try to alert SYR investors.
As can be seen, SYR seems to be facing a colossal amount of risks. Is the huge market cap close to a billion dollars justified? Surely seems extremely risky, and not much doubt about that.
Today, although it might appear that I have covered many risks, I have only actually covered 1 risk – that of market cap being abnormally high, considering so many risks. In the time to come, based on whether or not SYR investors give me the motivation to do so, I might cover each of the above risks and many more (above are just a few which struck me) in far more detail.
Cheers
(20min delay)