Edited Transcript of SYR.AX earnings conference call or presentation 29-Apr-19 12:01am GMT

Thomson Reuters StreetEvents•May 2, 2019

Q1 2019 Syrah Resources Ltd Earnings Call

May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Syrah Resources Ltd earnings conference call or presentation Monday, April 29, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Corr

Syrah Resources Limited - CFO

* Shaun Verner

Syrah Resources Limited - MD, CEO & Director

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Conference Call Participants

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* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* William Morgan

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Syrah Resources First Quarter 2019 Update. (Operator Instructions) I'd now like to hand the conference over to your first speaker today, Managing Director and CEO, Mr. Shaun Verner. Thank you. Please go ahead.

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Shaun Verner, Syrah Resources Limited - MD, CEO & Director [2]

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Thank you very much. Good morning, and welcome to Syrah results for this first quarter of 2019 update. With me on the call today, we have David Corr, our Chief Financial Officer; and Nova Young, GM of Investor Relations.

Balama's operational performance in Q1 and the momentum in improvement in optimization programs on site has given us increased confidence for the rest of the year. Whilst there's much left do to capture recovery improvement, product mix and great opportunities, we're on a strong track. Natural Graphite pricing conditions are challenging today as we bring significant new volumes to market in a short space of time, but volume demand is strong for our products relative to the existing market. And we remain highly focused on developing long-term baseload relationships with counterparties, particularly in the battery sector.

We'll work through the slides that we released this morning along with the quarterly, recognizing that the fair amount of the information was released straight after quarter end. So I'll take you to Slide 2 and the headlines. Firstly and most importantly on safety, our total reportable injury frequency rate was excellent during the quarter at 0.6 per million man-hours worked as of the end of the quarter, with infield safety leadership continuing to develop well in being a real differentiator in continuing to improve that performance.

On production, Balama produced 48,000 tonnes of natural flake graphite during the quarter, up 45% compared to Q4 2018 with record production in March of around 19,000 tonnes. Our C1 operating cash costs continue to decline in line with higher volumes and diligent cost management, and we're on track with our expected path towards $400 a tonne towards the end of the year. We sold and shipped 48,000 tonnes equivalent to production for the quarter and up 30% against Q4 2018. This was achieved with continued improvement in contract performance and logistics. The weighted average graphite price achieved on a CIF basis was USD 469 a tonne, which is obviously lower than we originally planned. And we're going through some of the details around that later on the call.

Our end market demand drivers remain very positive with final calendar year 2018 steel production up 4.6% year-on-year and global electric vehicle sales growth of 64% heading into a strong start to 2019.

Our Battery Anode Material strategy continues to progress well, albeit with a minor weather-related delay to the startup of the purification circuit. In our plant site in Louisiana, unpurified spherical graphite was produced with Balama feedstock and is being dispatched to targeted ex China customers.

Installation of the purification equipment for batch processing progressed well during the quarter from the outstart, with commissioning of the purification circuit now to commence in May, and initial production of purified spherical graphite planned during this quarter. A significant review of our plans for a commercial scale BAM plant, including a flow shape and product development review is essentially complete, providing attractive economic outcomes. And we'll be in a position to provide details and key elements of the study this current quarter.

We ended the quarter with USD 62 million cash versus our forecasted between USD 65 million and USD 67 million. Net cash outflow was USD 14.7 million in the quarter against our plan of around $20 million. The variance of around $5 million was due primarily to timing differences, finance rolling into the second quarter.

Q2 group net cash outflow is planned at USD 14.5 million plus the $5 million delayed timings from Q1 for a total forecast of USD 19.5 million net outflow. And the cash balance at the end of Q2 is around $43 million. We're working hard to reduce costs and improve our prices in order to achieve positive operational cash flow as soon as possible even in situations where lower prices may persist.

Finally on funding. Extensive engagement in development of debt funding alternatives was progressed in the quarter, and we continue to evaluate these funding options in order to maintain a strong balance sheet. As we move through the second quarter, we see that the combination of greater volumes of cost and cash flow management and price improvement and, critically, the completion of the majority of spending on BAM, so it has really stabilized the operational cash position from Q3 onward.

Moving on to Slide 3 in sustainability. Although we continue to experience a higher rate of malaria infection at Balama during the wet season, during the first quarter, we undertook rapid detection and prevention screening measures for over 3,000 people [from the] townsite of Balama with 295 malaria cases treated and averted. Our regular Environmental Monitoring Program continued in line with over 200 license conditions with no significant incidents during the quarter. And we commenced preparation for the renewal of our environmental license in April 2020.

Over the last 12 months, we also have been reviewing the Balama Tailings Storage Facility for the potential to transition from wet deposition to dry stacking through our TSF Governance Framework. Whilst we have a conservative tailings storage facility management process and are comfortable with the existing wet deposition plan operationally, dry stacking has the potential to materially reduce a large amount of CapEx and reduce the tailings footprint. And our decision on investment around this will be from [cell 2] of the 2 sets we'll be taking later this year.

Our initial training intake of 30 students from the host communities around Balama at the Balama Professional Training Centre completed their 3-month mechanical and electrical courses this month. With continuing enrollments underway, it is something received very positively in the community.

Company and employee donations and direct assistance were arranged for the Mozambique Red Cross Appeal to support the impacts from Cyclone Idai and recovery efforts. The cyclone impacted the city of Beira in the Sofala province in Central Mozambique around 1,000 kilometers from the Balama site. Mass support continues to those that suffered as a result of that cyclone. Late last week, as most people would be seeing on the news at the moment, a second significant weather event, Cyclone Kenneth struck Mozambique closer to our operations, and whilst rain and wind were recorded at Balama during the cyclone, preparatory action on site was established to ensure the safety of our people and security of our operating equipment. The Balama operation has not been impacted at this point, but we are seeing disruption to logistics flow, but currently nothing which will materially change our position for Q2. And we'll obviously keep everyone advised if that changes and if there is still a significant amount of rain in the area.

As with Cyclone Idai, we will be assessing how we can assist in Cabo Delgado province as this is necessary.

Moving on to Slide 4 in operations. As we've noted, we've seen a significant increase in consistency and performance with Balama in Q1 over Q4 last year with 5 months of improvement now evident following the fire in October 2018. In Q1, 48,000 tonnes of natural graphite was produced equating to almost half of the total annual production in our first year. Equipment management improvement and process control recovery improvements late in March led to an even greater operational stability. And we achieved a record month of production in March of around 19,000 tonnes.

Total material moved, from a mining perspective, was lower than planned due to ROM stop management and reduced waste stripping to maintain efficiency of the fleet during wet season. Whilst Q1 recovery was broadly similar to the prior quarter, the recovery improvement plan continues to be implemented with a number of trials and learnings run through the quarter. Improvements via flotation control in graphite liberation, equipment stability and operational processes saw stronger results in March. And we're still expecting to lead -- for those improvements to lead to the achievement of our medium target of 88%.

Production comprised 86% fine flake and 14% coarse flake, which underperformed our expectations as we work through recovery in great trials. Actions are being implemented across mine planning, oil blending and dry screening to achieve the fines to coarse flake ratio targeted around 80% fines and 20% coarse in 2019 and transitioning 70% fines and 30% coarse as a split in the medium term.

We have confidence that this is possible, given the ratio of material in the ore feed is still absolutely representative of that outcome. Average fixed carbon grade was 95% with a range of 94% to 97% in finished products. We're focused this quarter on seeking to increase the proportion of 96% and 97% material to contribute to the improvement of weighted average prices. As a result of higher volumes and cost management in mining and operations in processing, C1 operating cash cost per tonne declined in line with our ramp-up path during the quarter with a major focus on further cost reduction initiatives as we move forward.

We also provided an update reserved -- to our reserves and resources with Balama hosting the world's most significant operating graphite ore reserve of about 114 million tonnes at 16.4% TGC for around 18.5 million tonnes contained graphite at a 7.2% cut-off grade.

Initial sampling of the Vanadium content through the Balama processing plant circuit was also completed during the quarter, showing similar Vanadium content to the 2014 scoping study. We have commenced marketing days from around the Vanadium options. And we plan a metallurgical test work program to further advance that value.

Our operational focus for Balama is very clear: Firstly, improved recoveries will continue to improve consistency and efficiency of operations; secondly, structural cost management initiatives in conjunction with volume increases are important for sharpening C1 costs; and thirdly, an improved coarse flake percentage and higher carbon grade will directly increase the weighted average price into existing contracts.

Moving on to Slide 5, and in sales and marketing. Strong volume demand and ongoing improvement in logistics and contract performance were key drivers of the 30% sales volume growth from the prior quarter to 48,000 tonnes of natural graphite sold in the first quarter of 2019, with an additional 18,000 tonnes of inventory included in Nacala allocated to sales order and awaiting shipment at the end of the quarter. For the purposes of interpreting the 5 -- the appendix 5b, revenue is only recognized after ship sales, and cash receipts averaged about 30 days after shipment. You will note in the appendix 5b that sales revenue looks slow as cash receipts from December shipments received in January is still capitalized as per the declaration of commercial production from January 1, 2019. The weighted average price received in the first quarter was $469 a tonne, and that resulted in sales revenue of around $23 million for the quarter. The price achieved was lower than planned and reflects a number of factors beyond just by supply/demand conditions. The product mix, i.e. the coarse to fines ratio was lower than planned, as I mentioned, and a higher proportion of fines sales into China led to a lower weighted average price despite robust volume demand. And our progress towards the closeout of our lower price contract volume carried over from 2018 further impacted the gross we achieved.

The big 2018 contract volumes are expected to be completed predominantly in Q2. I previously discussed the marginal pricing of fines being determined in the Chinese domestic market. And the disconnected nature of the fines pricing between the China and ex China markets remains apparent with prices ex China reflecting the incentive price for China to export. Whilst China is still a net exporter of natural graphite at the moment, we expect this dynamic to change, and the trend is absolutely heading in the right direction with our expectation of China becoming a net importer of natural graphite late in 2019 or into 2020.

As we have previously noted, the amount of commodities when Chinese demand increases in quality, driven by value and use and/or environmental issues becomes the key import driver, prices tend to move significantly.

Syrah is the first major exporter of natural graphite to China and the world's largest high-grade producer has now established significant volume into the battery end-use markets. And we're increasingly stronger in place to benefit from growth in the bonds market through a high-quality customer base in both battery and industrial markets.

Coarse flake prices in China remain broadly similar to the rest of the world, and that's given the relative supply/demand balance in China and outside, but we've noticed this market is low in growth and a smaller part of the overall natural graphite market. Volume demand for Syrah's products during the quarter continued to be strongest in China reflecting a solid battery segment demand growth. Ex China steel and industrial application demand for Syrah products strengthened steadily as we continue to establish ourselves as the consistent long-term supplier of high-quality natural graphite into some of the more conservative markets such as Japan, which we've taken longer to penetrate with significant volumes.

Progress continues to be united in the logistics side of the business with regular daily outcomes achieved on product dispatch from Balama, customs clearances from the cross-dock facility and deliveries into Nacala port during the quarter, which have been key enablers for sales volume growth. Annualized supply chain throughput of 250,000 tonnes has been achieved already and demonstrated higher individual daily performance. And for dispatch, trucking and port delivery aspects of the supply chain showed a strong support and progress towards being able to support the nameplate 350,000 tonnes production rate through the supply chain.

Moving on to Slide 6. And just to reiterate some of the commentary we went through last quarter regarding pricing expectations, we do see that there are a number of variables, which give us strong upside price potential. Firstly, improving in the product mix to 20% coarse flake through the course of this year. And secondly, great optionality, seeing it's achieved a premium, which is demonstrated in our existing contracts through sales of 96%, 97% and 98% fixed carbon products, and work has been undertaken in the first quarter towards both of these targets seeking to improve our performance in Q2 and beyond. Additionally, our regional split will continue to evolve towards markets where Syrah provides an import, strategic sourcing alternative to existing China end supply. The greater volume, commitment and reliability that we're able to make now that production has increased and is more consistent and the value-in-use driven differentiation are becoming more and more important. As we mentioned, the older contracts with lower prices carried over from 2018 fall away this quarter. And ultimately, the greatest driver will be the ongoing growth in domestic Chinese consumption and the shift towards high-quality fines from -- taking China from a net export to a net import market balance.

Moving on to Slide 7 in some further commentary around the markets. EV growth and battery capacity investment continues to support strong natural graphite demand. Steel remains the current predominant demand driver, and steel production growth was around 4.6% in calendar year '18, driving strong demand into the natural graphite market.

In the growing battery end market segment, growth in EV demand continues to support Syrah's expectation of between 70,000 tonnes and 100,000 tonnes of incremental natural flake graphite demand this year. Last year, global electric vehicle sales grew by 64% to over 2 million units with a very strong growth in China, which made up over half of 2018 sales. And whilst there's some short-term concern around the impacts of Chinese EV subsidy changes and the significant growth in manufacturing capacity potentially not being utilized as quickly as expected, but we see the demand outlook is very -- still, very positive. We attended the China auto show last week and remain confident in the pace of development increasing battery sizes per vehicle and the overall demand outlook. And it's worth noting that the changes to Chinese subsidies have continually been implemented over the last 2 years. And demand has continued to grow despite those changes.

China continues to dominate battery manufacturing capacity expansion. BYD, China's leading new energy vehicle producer commenced construction of a new 20 gigawatt hour facility with an investment spend of around USD 1.5 billion. In February, Chinese government mandated the replacement of all ICE buses with electrified models in all major cities by 2020, which is significant as lithium-ion battery sizes for buses range from 150 to 300 gigawatt hours, much larger than the average full electric passenger vehicle. And those types of batteries require between 150 kilos and 380 kilos of natural graphite per battery.

Whilst we're on China, natural graphite supply through the last quarter continued to be impacted by seasonal shutdowns and some of the prior environmental restrictions. However, seasonal production restarts are expected from mid-Q2, which will increase competition particularly in the lower carbon grade fines segments. During 2018, synthetic graphite prices remained elevated due to demand growth from E.A.S. steel manufacturing, reduced electrode manufacturing capacity and a limited supply of key needle coke raw material. Battery market anode producers continue to work on increasing the proportion of natural graphite in the anode driven by cost and driven by the downstream buyers.

Moving on to Slide 8 and looking specifically at some of the lithium-ion battery capacity expansion. Currently, the battery anode material producers are almost exclusively based in China, Japan and Korea. And Syrah's natural spherical graphite competition is entirely Chinese.

The map on Slide 8 provides us an indication of lithium-ion battery expansions and the focus in Europe and the U.S. with the capacity investment announcements providing further evidence of the industry's commitment to the longevity of the lithium-ion battery and the requirement for colocated suppliers in the battery supply chain bodes well for our U.S. facility. During the quarter, SK Innovation announced a $1.7 billion, 10 gigawatt hour per annum battery plant in Atlanta, and General Motors is also investing another $300 million in its Michigan assembly plant to produce a new Chevrolet EV. In Europe, China's CATL is investing another EUR 250 million for an expansion to the planned plants they're building, and SK Innovation also plans to invest around USD 900 million in an additional battery plant. So that obviously gives us confidence around what we believed was going to occur in regard to the 3 major battery manufacturing regions evolving between the Americas, Europe and Asia.

Moving on to Slide 9 and our Battery Anode Material project in the U.S. During the quarter, we produced unpurified spherical graphite using Balama feedstock for qualification purposes and product development purposes and in preparation for the commissioning of the purification circuit, all of which requires relatively small volume to present. We dispatched unpurified spherical graphite for qualification targeting ex China customers, with qualification period generally between 3 to 6 months depending on the customer internal processes and the feedback loop on specifications.

Installation of our purification equipment for batch processing progressed well from our perspective, however, initial production of purified spherical graphite has been delayed slightly, primarily due to the timing of the City of Vidalia gas line extension, the provision of gas to us, which has been impacted by an unseasonably high Mississippi River level impacting the timing of the gas line extension works which are adjacent to the Mississippi River levee. In order to manage costs accordingly, commissioning of the purification circuit is currently planned for May and first purified spherical production planned during this quarter.

Excellent progress was achieved with our major review of the commercial scale BAM plant, and we've essentially completed that work platform and some further product characterization. The revised plant flow-sheets, capital expenditure profile and product range provides a number of project option with attractive economics. Key elements of this review will be released during this quarter, along with an outline of development timeline scenarios, which are driven by different funding and partnership options.

We also made good progress on our anode product development, primarily focused on facilitating cost reduction and increasing product performance. We continue to derive value from the input through our relationship with Cadenza Innovation, which remains key to our product development despite Cadenza's CEO, Christina Lampe-Onnerud, leading the Syrah board through the quarter. Christina is focused on the service relationship between Cadenza and Syrah simplifying things from a government's perspective for us, removing any potential or perceived conflict of interest as our BAM activities accelerate. Our progress on the BAM strategy has provided an expanded commercialization opportunity, and customer engagement is able to increase after expected purification, spherical samples from Vidalia, our product development progress and the detailed commercial plant plan review.

With that, I will hand over to David for an update on finance.

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David Corr, Syrah Resources Limited - CFO [3]

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Thanks, Shaun, and good morning, everyone. Moving to Slide 10. The group ended the quarter with cash reserves of $62.4 million, a net decrease of $14.7 million against our original net outflow forecast of $20 million for the quarter. The difference of $5 million was due to the timing difference on payments, which is previously announced to roll into Q2.

Net cash outflows during the quarter comprised of $7.2 million for Balama, of which $2.6 million related to net working capital movements associated with precommercial production trade payables and receivables. Commercial production with Balama was declared effective from 1st of January 2019, resulting in all revenues earned and operating expenses incurred from this date being recognized on the income statement and separately presented in the appendix 5B of cash flows from operating activities.

On BAM, we spent $6.5 million against our initial forecast of $8 million, with the variance representing a timing difference rolling into Q2. The majority of the BAM spend during the quarter related to the development of an installation of equipment at the BAM plant in Vidalia, Louisiana, but also included costs associated with BAM commercial scale plant and product development works and production of unpurified spherical graphite. The remaining $1 million of cash outflows related to corporate and administration activities net of interest received on cash deposits during the quarter.

Looking forward, our planned net cash outflow for Q2 is $14.5 million, plus the $5 million of payments which have rolled over from Q1 for a total forecast outflow of $19.5 million comprising of: $12.5 million to Balama; $6 million to BAM; and $1 million for corporate and administration activities, with the group planning to have a forecasted cash balance of $43 million at 30 June 2019. The group's quarterly net cash draw is reducing quarter-on-quarter as production and sales volumes improve. With the USD 35 million cash draw in Q4 2018 improving to a normalized $20 million cash draw in Q1 2019 and a planned USD 14.5 million cash draw in Q2 2019.

We also expect further material improvements in the group's net cash draw into Q3 with the completion of BAM capital expenditures during Q2 and a continuation of operational improvements at Balama, including increasing production, improved flake to fines product mix and the implementation of structural cost management actions. Unit operating costs for March 2019 where a higher recovery, plant availability and utilization delivered record production put us on track to achieve C1 cash operating costs of $400 per tonne by year-end with the continuation of operational improvement and structural cost management at Balama.

And we have mentioned in the past, we continue to pursue debt funding options to provide additional liquidity for the group and to maintain the strength of our balance sheet. During the quarter, there was extensive engagement with financiers regarding potential debt funding options for the group. At this time, we're not in a position to provide any further detail, but we continue our work with financiers. And we'll update the market as we progress.

I'll now hand back to Shaun to provide further details on the outlook and to close out this presentation.

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Shaun Verner, Syrah Resources Limited - MD, CEO & Director [4]

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Thanks, David. So looking at Slide 11 and the outlook for the balance of 2019. So as mentioned last quarter, 2019 outcomes will be driven by the balance between sales price versus unit cost. We'll focus the rest of the year on driving down unit costs, both structurally and through volume increase, whilst also maximizing our realized sales price outcomes to ensure margin cash impacts are optimized.

At Balama, we're targeting Q2 2019 production of 50,000 to 55,000 tonnes of natural flake graphite, with the full year production target unchanged to $250,000 subject to market conditions and recognizing the continuing ramp-up of production through the second half of the year. We will continue to focus on product mix optimization to improve the coarse flake proportion and increase the carbon grade distribution to higher content, enabling price improvement.

From a marketing perspective, our increased production consistency and stabilized logistics throughput provides a solid base for customer confidence and a stronger negotiating position for Syrah. Higher prices will be achieved through a combination of: improved product mix; higher grade skewed towards 96% and 97% fixed carbon products; the close out of lower priced 2018 contracts; and further geographic diversification, ex China.

In essence, what we're trying to achieve is a cash flow breakeven point from which we see additional demand draw volume into the market at incentive pricing to impact the pricing across the sales book for all material which is priced on a market basis.

From a BAM perspective, at Vidalia, commissioning of the BAM purification circuit for batch processing is planned for May, with first production in purified spherical graphite in this quarter. Key details of our BAM commercial plant review will be released during Q2 with ongoing product development to support the commercialization focused on cost reduction and improved product performance continuing. The development time line will be driven by funding and partnership options, and we look forward to discussing them further. We note though that we're diligently managing our cost and cash. And the timing of further BAM expenditure beyond Q2 2019 is being managed in conjunction with the Balama cash flow profile.

We expect to end the second quarter with at least USD 43 million based on the outline that David has given. We're targeting the earliest possible positive operation of cash flow from Balama, which will be driven by price realization and structural cost management improvements in conjunction with greater volume. Immediate margin improvement actions are already underway. With BAM CapEx largely complete during this quarter and increasing Balama production optimization sales growth and cost management actions, we expect the group cash draw to reduce significantly from Q3 onwards. All of this contributes strongly to improving our funding options. And debt options continue to be evaluated to ensure we maintain a strong balance sheet.

So to summarize, the first quarter of 2019 was significant for Syrah with production improvement plans continuing to deliver plant stability and production consistency, and we exited the quarter with a very strong run rate. There's still work to do though on further recovery, product mix and carbon grade distribution, but the foundations for achievement of our targets are well and truly in place. Strong demand conditions and logistics improvements continue to drive growth in sales volumes and in conjunction with production improvement and operational stability, it builds confidence for our customer base that Syrah is a consistent long-term supplier of high-quality natural grade graphite.

On BAM, we continue to progress our strategic priorities providing a renewed pace of potential customer engagement for product development, commercial plant and partnership opportunities, and battery manufacturing capacity continues to expand, and customers are seeking an alternative ex China source of natural graphite in those materials. We look forward with some confidence to a greater stability in Balama's operations, cash flow improvements and pursuing growth through not only Balama but also at BAM and the Vanadium opportunities.

And with that, I will conclude the presentation and open up for questions.

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