Production of graphite at Balama, Mozambique, continues to be affected by delays to Syrah Resources’ ((SYR)) production improvement plan and the company has downgraded guidance to 45-50,000t from 50-55,000t for the June quarter. This is a -10% reduction in guidance, while recoveries are unchanged at 69% and reflect no benefits of optimising the plant, Credit Suisse points out.
Product split is still 86% fines and 14% coarse and UBS notes an eventual lift in coarse flake production is the key to better margin and cash flow, given current price differentials.
The broker reduces realised prices by -9% for 2019/20 to reflect a slower ramping up to the final product mix of 68% fines. Product mix is important, Macquarie agrees, in order to achieve realised prices. The broker had expected a 30% contribution of the higher-value coarse product.
The company has indicated pricing to date is US$466/t, below expectations that were based on commentary in February when management said legacy contracts would largely be completed in the June quarter.
UBS expects pricing should lift in the second half and cash flow is likely to be positive in the September quarter, based on realised pricing moving above US$500/t. This should be achieved if legacy contracts have been eliminated by that time. Until the stock is positive in terms of cash flow, UBS suspects the market will remain cautious about the outlook.
The company has managed to maintain cash within projections, at US$43m at the end of June. Credit Suisse believes this is an indicator of good control of costs and agrees it is a positive, given production constraints and lower sales prices. The broker expects the draw down of cash in the September quarter should be significantly reduced and cash flow should stabilise from there.
The March quarter cash outcome of US$62m may have bettered guidance, but the broker points out this was temporary and achieved because of the favourable timing of working capital. Around US$5m worth of payments in the first quarter were deferred to the second. March quarter cash consumption included US$6.5m on the BAM (battery anode material) project in Louisiana.
The long-term outlook is dependent on progress being made at the BAM, in Macquarie’s view. The commercialisation of BAM and funding are key to the broker’s valuation of Syrah Resources. UBS also has BAM accounting for around 60% of valuation.
FNArena’s database has three Buy ratings and two Hold (Deutsche Bank and Morgan Stanley, yet to comment on the production update). The consensus target is $2.17, signalling 110.7% upside to the last share price. Targets range from $1.20 (Deutsche Bank) to $3.30 (Credit Suisse).
