Syrah Resources Limited (SYR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Syrah Resources Q4 Quarterly Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, to Mr. Shaun Verner. Thank you. Please go ahead.

Thanks very much. Good morning to everyone, and thank you for dialing in today. With me on the call is Stephen Wells, our Chief Financial Officer; and Viren Hira, GM of Business Development and Investor Relations. Today, Syrah released its December 2021 quarterly results covering operations, market conditions, the Vidalia project, and the outlook for natural graphite, active anode material and its end-use markets. The fourth quarter and 2021 as a whole was an extraordinarily important period for Syrah, repositioning the company at a transformative point for the industry. Market conditions in the upstream market are the strongest they have been since Balama's commencement in 2017, with very strong momentum in demand growth, the existence of supply interruptions and rising prices for natural graphite. The electric vehicle market has shown remarkable growth through 2021, with sales doubling year-on-year to more than 6 million units, monthly global EV sales exceeding 800,000 units for the first time in December, and global EV penetration reaching approximately 8%. Growth is expected to be sustained and this is driving significant EV and battery manufacturing expansion announcements and capital programs in our downstream target markets, and the concurrent gap is evident in localized supply with input materials in the U.S. and in Europe. Syrah's signing during the quarter of a fixed volume and price offtake agreement with Tesla for active anode material from the Vidalia facility in the U.S. marked the importance of Syrah's integrated business in potentially starting to fill a part of that gap. And all around the world, governments and markets recognize the key role of critical minerals, such as graphite, in automotive electrification and energy storage development towards the objective of reducing carbon emissions. Positive ESG differentiation also continues to rise in importance as greater understanding sees challenges in parts of the existing battery material supply chain. Each quarter, we reiterate our belief in the importance of the Balama asset and our vertically integrated active anode material facility at Vidalia. So the future of this transition and as 2021 closed, we saw that this is becoming more apparent to customers, investors and governments. Whilst disappointing, the disruption in the global container shipping industry constrained Balama's production and sales in recent months, we have developed a major logistics option to reduce the future impacts and head into 2022 with strong optimism around Balama's future and the potential for near-term FID approval at Vidalia. Slide 4 reiterates our fundamental ESG commitments and performance focus and every quarter that passes highlights the criticality of this effort. Since the company's commencement, ESG excellence has been a key focus, and we're beginning to see the very real impact of downstream customer requirements and supply chain auditing bring differentiation between incumbent production and add cells into sharp relief. During Q4, Minviro we completed a detailed independent life cycle assessment of Syrah's integrated operations from Balama origin to Vidalia active anode material customer gate in accordance with ISO standards. LTA is a globally recognized and scientifically validated methodology to quantify direct and embodied environmental impacts along the life cycle of a product or process. And Minviro is an independent third-party consultant with an established track record of life cycle assessment in the battery materials space. The approach incorporates all material and energy inputs and direct emissions to air, land and water associated with the production of the product or process and identifies environmental hotspots in the production process via an assessment of an overall global warming potential outcome. Minviro's LCA estimated that Syrah's operations exhibit materially lower global warming potential compared with representative natural graphite and synthetic graphite anode material suppliers benchmarked in China. The company is also advancing specific projects, including the solar and battery system at Balama and longer-term power options for Vidalia to further reduce the environmental impact of its operations. It's worth noting here that a lot of partial chain information is being communicated to the market around LCA. Syrah is committed to making the full chain from mine to final product visible and encourages care to be taken in making comparisons to ensure that definitions are not being cherry-picked to derive a particular desired result by others. Specifically moving on to ESG outcomes for the quarter. Our health, safety and environment performance remains outstanding. Our TRIFR at Balama was 0.5 in the December quarter, and the Balama TRIFR has remained below 1 since late 2018. Our TRIFR at Vidalia was again 0 in the December quarter. We recorded a number of further positive COVID-19 cases at Balama late in the quarter after around 2 months with no new cases. All cases were minor or no symptoms and there's been no impact on operations. Syrah has robust COVID-19 protocols in place, and these allow us to effectively manage at Balama without interruption. Syrah has also made available and promoted vaccination and now 97% of employees and contractors are vaccinated at Balama. The company is also supporting vaccination efforts in its host communities. We'll skip over the quarterly summary slide and go straight to the detail, and I'll hand over to Steve here to make some comments on the market and our corporate position. Steve?

Thank you, Shaun, and Good morning, everyone. As Shaun noted, 2021 was a watershed year for EV production and sales with a huge number of legacy automaker programs and model announcements demonstrating mainstream integration. Slide 6 shows our primary leading indicator, global electric vehicle sales. Very positive momentum continued in EV sales and penetration in the fourth quarter. Global EV sales grew 115% in 2021 versus 2020 to approximately 6.2 million units with strong demand growth in China, Europe and the U.S. Global EV sales were more than 850,000 units in December 2021 alone, a staggering outcome when compared to full year results of just over 2 million units only 2 years ago. Most analysts project further strong increases across all major geographies in 2022 and beyond, supported by growing consumer adoption and government policy. EV sales and battery demand growth are obviously causing strong momentum to flow through the demand for anode material. As demonstrated by total Chinese active anode material production increasing to a record 71,000 tonnes in December 2021 and Q4 representing an almost 50% increase on the fourth quarter of the prior year. The trend on this front has been very strong over the past 18 months and our interaction with spherical graphite processes in China demonstrate very robust demand. This demand growth has hit some supply headwinds with both artificial graphite and natural graphite AAM supply in China being impacted by production challenges, which has reduced inventory. In the case of synthetic graphite activate anode material, the impact of power disruptions, rising power prices and an increased focus on emissions in Q4, reduced availability and increased price of the synthetic products. And as highlighted on Slide 7, the upstream natural graphite fines market has seen strong demand conditions coincide with supply disruption amongst Chinese domestic producers. Major Chinese production sources have been impacted by environmental restrictions, including tailings challenges, air and effluent emissions, as well as seeing the same power cost and disruption challenges that have impacted the synthetic graphite active anode material producers. These domestic Chinese market dynamics have coincided with the annual winter domestic production outage period, resulting in very low natural graphite inventories, exacerbated by inboard challenges caused by disruptions in the global shipping market and channel logistics disruptions from COVID lockdowns. As a result, third-party price reporting agencies are recording a significant increase in Chinese domestic natural graphite fines prices as demonstrated by the 2021 spot price chart on Slide 7. It's important to note that Syrah's weighted average price achieved may not reflect the spot price as it includes prices for sale under a mix of spot and term contracts and different pricing mechanisms. We are, however, seeing contracted prices increasingly strong for new deals and spot shipments. Slides 8 and 9 provide the latest picture of the global and relevant regional battery manufacturing capacity pipeline forecasts and announcements as well as the resultant graphite battery anode material forecast requirements. The growth ahead for the industry continues to strengthen, in particular, for Syrah's Chinese natural graphite target customers and the U.S.A. active anode material market, providing a very strong backdrop for the company to increase production capacity utilization of Balama and a great setting for Vidalia's potential initial expansion. Moving now to the corporate front. Syrah finished the quarter and the year with a cash balance of USD 53 million compared to $74 million at the end of Q3. Given the confidence in progressing with Vidalia construction in the near term and to maintain the expected project schedule, we continue to invest in detailed engineering activities and procurement of long lead items at Vidalia. Syrah also completed the purchase of an adjacent parcel of land that will facilitate construction activities of Vidalia's initial expansion as well as provide the required space to potentially expand the facility further as the market grows. The total amount of Vidalia investment through the quarter was $6 million. With shipping constraints causing lower production and sales than anticipated in Balama, we were not able to achieve our minimum 15,000 tonnes per month production target, and there were also several one-off items through the quarter, including a final paycheck for local Mozambican staff. We have also extended our procurement working capital cycle to ensure we are not impacted by any challenges to production inputs while shipping transit times have extended our receivables collection time frames. Funds continue to be received, just later. Similarly, there is a lag between higher shipping costs being incurred at present and increased pricing on tonnes being shipped compared to what we're experiencing on new orders. However, this will balance out, and there is strong upward pricing pressure through the order book, which will more than compensate for the shipping price increases we have seen. Over the short to medium term, we would see shipping costs stabilizing and beginning to moderate should the shipping market normalize, while current price support for natural graphite based on market factors is very strong. In the current market, we are also likely to achieve prepayment of natural graphite sales through breakbulk shipments, which will also improve working capital. Concurrent with the Vidalia FID processes, Syrah continues to review funding requirements for the initial expansion and is engaged with government agencies relevant to critical minerals developments. As a result of these initiatives and the Vidalia production offtake work, corporate costs were also higher than normal during the quarter. I'll now hand you back to Shaun.

Thanks, Steve. And starting on Slide 10 through to 14, we move to Balama production sales and logistics performance in Q4. Whilst disappointing that the global container shipping industry disruption continues to constrain production and sales, there are 2 critical takeaways beneath the headlines. Firstly, plant performance in the second half of 2021 was better than in any prior period, benefiting from ongoing incremental improvement programs. And secondly, we worked through a major option for alleviation of the shipping constraints from the first quarter of 2022. December 2021 quarter production was constrained by maximum inventory positions early in the quarter at Balama and Nacala and the continued promises of improvement in container shipping market disruption taking longer than expected to eventuate. This forced us to critically evaluate the alternatives and has led to the development of an additional breakbulk shipment option, which I'll speak to further in a moment. And that improvement is expected to materially improve production and sales from the March 2022 quarter. At Balama, 13,000 tonnes of natural graphite was produced at 82% recovery and 19,000 tonnes sold during the December 2021 quarter. All 20,000 tonnes of finished product inventory at the conclusion of the quarter was contracted to customers. And in fact, much of that has since been cleared with a strong start to 2022. Product quality was consistent with previous quarters with stable recovery in grade, and we achieved a record 89% recovery in campaign operations during December. Our strong operational performance demonstrated during campaign production runs in the quarter saw us produce at an average daily production run rate of 16,000 tonnes per month pro rata and a maximum daily production rate of 24,000 tonnes per month pro rata. So we have strong confidence in increasing Balama production with continuous operations. Our C1 cash costs of USD 1,159 a tonne for the quarter is reflective of a fixed cost base and low production level for the quarter. Balama C1 cash cost guidance is at USD 430 to USD 470 a tonne at a 15,000 tonnes per month production run rate. Balama unit costs are expected to reduce materially as the production rate increases beyond 15,000 tonnes per month. During the quarter, planned maintenance was also brought forward and optimization works completed with sustaining capital and TSF development spending of around $2.2 million for the quarter, giving us a strong open run at consistent production as inventory levels clear. On Slide 13, we move to some further detail on the sales side. Starting Q4 with more than 45,000 tonnes of sales orders, sold and shipped 19,000 tonnes of natural graphite constrained by the ongoing disruption in the container market and primarily the inability to secure sufficient container capacity for Balama products on vessels sailing from Nacala to meet prevailing demand. Given the China market conditions that Steve mentioned previously, we are seeing exceptionally strong demand and forward contracting with end user customers, and we're currently sitting with more than 80,000 tonnes of sales orders for the March quarter in backlog to work through. The weighted average sales price increased to USD 530 a tonne set in the December quarter, and further price support is evident in coarse and fines market post quarter end. New sales are being contracted at higher prices than achieved in the December 2021 quarter. Fines sales accounted for approximately 80% of overall product sales during the quarter and the fines market is, for the first time, consistently exhibiting stronger price growth momentum than the coarse market. Chinese natural graphite supply disruption and the challenges in the shipping market severely affected Chinese inventory and restocking of natural graphite ahead of the seasonal winter production outages and tight market conditions are expected to continue. Container shipping availability is expected to improve through this quarter with additional capacity being added in lower seasonal competition expected from the agricultural sector out of Mozambique. Ongoing China port disruption from COVID lockdowns does remain a possible challenge. So whilst I expect container shipping availability to improve, we've taken action to improve sales and alleviate the inventory constraint on production. And Slide 14 outlines a major new logistics options that we have developed to commence breakbulk shipments through Pemba port. Breakbulk shipments will provide an additional export route for Syrah, enabling 3 things: flexibility in managing inventory between Balama, Nacala and Pemba. Secondly, significantly higher Balama product sales than could be achieved solely through Nacala port and containers at present. And then thirdly, higher production rates at Balama, facilitating more than 15,000 tonnes a month of production. Our first 10,000 tonne breakbulk shipment from Pemba to China is scheduled in early February, and we have significant further customer demand for such shipments, which have a shorter transit time, less likelihood of delay impact of load and discharge and an improved payment profile. Pemba is approximately half the distance of Nacala from Balama by road and Syrah's integrated logistics service provider is providing transport and custom services for exports from Pemba with additional warehousing contractors added. The combination of Nacala container shipments and Pemba breakbulk is expected to materially increase export sales and alleviate the inventory constraints previously impacting Balama production. Moving on to Vidalia on Slide 15, 16 and 17. We are well progressed in the processes to facilitate a final investment decision on the Vidalia initial expansion in the near term. We were very pleased in late Q4 to announce the offtake agreement executed with Tesla to supply 8,000 tonnes of active anode material per annum from Vidalia at fixed price for an initial term of 4 years. This agreement underpins Syrah's movement into the final phase of assessment for the initial Vidalia expansion and also contains an option for additional volume supporting evaluation of further expansion beyond the initial phase, consistent with the market growth and announcements that we've talked about. Ongoing commercial and technical interactions demonstrate strong interest from other target customers in the remaining volumes and our future plans at Vidalia and are providing a strong motivation for Syrah to assess a potential accelerated larger expansion at Vidalia beyond the initial expansion project. Detailed engineering of the Vidalia initial expansion project is 50% completed and has supported the technology, design and operating assumptions in the bankable feasibility study from 2020. In addition, the detailed engineering and critical long-lead equipment procurement completed to date is continuing to build readiness to proceed to construction, subject to a final investment decision being made. With USD 79 million of capital invested to date in Vidalia's operations and project development, and the continuing development of the Vidalia team, the derisking of Syrah's entry into the downstream active anode material market continues towards the investment decision. As far as we are aware, we remain in the furthest progress of any company in the development of an ex-China vertically integrated source of natural graphite active anode material, leveraging the size, strength and operating history of Balama with an established facility and customer supported initial construction at Vidalia. We're pleased to have reached this stage as supply chains are under increased scrutiny and pressure, and we expect to communicate further around FID in the near term. To conclude, on Slide 18, Syrah is very positive about the period ahead. EV sales growth, a constructive demand environment for anode material and Chinese supply disruption are driving strong demand and pricing for Balama products. Increased shipping optionality, release of inventory constraints and strong demand should facilitate increasing Balama production beyond 15,000 tonnes per month and enable higher sales volumes. And continuation of our FID and financing processes are seeing us working toward a potential FID for initial expansion with active anode material of Vidalia in the near term. The current market and Syrah's progress demonstrate the unique position we occupy with the largest global integrated natural graphite operation at Balama and the most advanced option for vertically integrated supply of natural graphite active anode material outside Asia. We look forward to keeping you up to date with the company's progress. And with that, we'll move across to questions.

[Operator Instructions] Our first question comes from the line of Saul Kavonic from Credit Suisse.

Just a couple of quick questions, if I may, particularly regarding just the scope for shipping improvements. Perhaps just for some clarity here. Understand the breakbulk option you're referring to, is that just the Pemba port, or is that also an option you're pursuing at Nacala? And is it possible to just give some further color on the potential scale of the volumes you could be getting out of Pemba over the next 6 months?

Sure, Saul. Apologies for my lack of voice at the end there, I was just recovering from being unwell last week. So we'll see how we go on some questions. With regard to breakbulk, certainly, the initial plans that we have in place are out of Pemba. There is the possibility of breakbulk operations out of Nacala, but one of the issues at Nacala at the moment is ongoing investment, which is part of the issue for container shipments as well. So the initial plan is very much through Pemba. We've got good plans set up in place, and we'll see how the first shipments go and we'll provide some further guidance around potential later volumes as we move ahead.

Perhaps then, if I could probe it this way. You talk about a 10,000 tonne breakbulk shipment for Pemba in February. I mean, to my mind, that could indicate that we could get your 15,000 tonnes run rate almost entirely out of Pemba if things progressed well there. Would that be a fair inference? All things going well, Pemba capacity could meet or even exceed Nacala?

As I said, we'll see how things progress, Saul. But certainly, the combination of the 2 is pretty powerful. And Nacala continues to be very important for us now and in the future. We have a number of customers who take different sizes of shipments, and we need to be able to service both. But certainly, putting Pemba and Nacala together is a pretty powerful combination of lifting volumes beyond 15,000 tonnes a month for sure.

And 1 last clarification. When you refer to kind of the spot volume out of Pemba, that's just referring to the port, but still going into the same contract, is that correct? Or is this also going to a different market?

We are doing most of the breakbulk shipments into the spot market because they are under different logistics conditions. They are separate contracts and obviously priced accordingly.

Understood. I might try my luck here, but can you give us any indication of what kind of spread -- the difference in price you're getting on those spot volumes versus contract volume that is weighting in at that USD 530?

No. We've made some commentary there about the December quarter weighted average price being at USD 530. And obviously, the spot shipment being above that and strengthening significantly. So I'll leave it at that.

Our next telephone question is from the line of Mark Fichera from Foster Stockbroking.

Just a couple of questions. Firstly, on the FID for Vidalia. Obviously, earlier you previously said you're looking at FID by the end of this month. Now you're starting in the near term. I was just wondering what the reasoning is there for, I guess, the slight delay. And when you say near term, is this in the current quarter and would it be early or late this quarter? And then my second question is on the life cycle assessment. You mentioned in the quarterly that a third-party critical review is yet to be undertaken. What are your thoughts there in terms of when you think you'll make this third-party review and who would likely do that?

Thanks, Mark. So with regard to the FID, the technical commercial operation funding element of the FID review, the processes around them are well underway and progressing well. We recognize we communicated and targeted January, but the process is not completed yet. We will advise when they are complete. They're expected to be completed in the near term, and certainly, you can read that as within this quarter. There's no specific issues we're dealing with on that front. We're just working through the process to ensure we bring the best possible projects to execution. With regard to the Minviro LCA assessment, the potential for third-party independent review of the assessment really then provides the potential for an additional amount of disclosure around specific comparison points. One of the things that I've mentioned previously on prior calls is that this really is an emerging area. We've taken the most detailed and transparent approach that we could to the full chain from Balama origin to customer gate out of Vidalia. And we are waiting, I think, as well as doing a third-party review to see how others are continuing to describe these processes and making sure that the comparison points are fair and valid. So we'll work through that in conjunction with Minviro, but we're really pleased with what we're seeing so far in terms of the general comparisons compared to China.

Right. And just a follow through on that, Shaun. Is this, I guess, a key selling point in terms of some of the potential off-takers in terms of wanting to see that LCA in terms of making a decision, especially given the ESG thematics?

Yes, exactly. It's certainly all potential customers who are engaged with us around Vidalia. ESG is a key focus area for them, as is supply diversification, as is quality and cost. So this significant level of detail is something that we are able to disclose to them under those processes. And certainly, it's been very helpful on the way through so far in that differentiation.

[Operator Instructions] Our next telephone question is from Glyn Lawcock from Barrenjoey.

Shaun, firstly, I just wanted you to talk to me a little bit more about the 80,000 tonnes of sales orders. I mean that's over 25,000 a month of production. I mean, is that you've got to deliver that? Or -- how does that work? I mean, is that just what you've gotten that for delivery over the next 6 months and 9 months? Just trying to square the circle between that comment and your production rate at the moment.

Yes, sure, Glyn, the production rate has been constrained by the inventory position. So obviously, that's been key in developing the breakbulk option, the 80,000 tonnes of sales orders ahead of it. So a mix of previously contracted term contracts and spot sales that have been made over prior months and even more recently in anticipation of clearing some of the shipping issues. And of course, as I said earlier, the new spot shipment and spot breakbulk shipments being done under new terms as well. So we are endeavoring to work through the backlog as quickly as possible. Customers are all essentially willing to take the material, even though it's been delayed, because market conditions are incredibly tight, not just in China, but more broadly across the global market.

So Shaun, are you aiming to sell or ship 80,000 tonnes? And if you could get the logistics chain to work? Is that the inference from that comment?

Yes, certainly. We're looking to get up above 15,000 tonnes as quickly as possible and to be clearing through that backlog of sales orders for sure. We will have to continue booking new sales in conjunction with clearing that backlog because the breakbulk process gives us that opportunity to mix the 2 to be able to clear the backlog and continue to participate in the current market.

Okay, sorry, maybe I'm just a bit slow. But I mean even if you sell your product inventory at 20, that leaves you 60, which is 20,000 a month. So if this sort of sales orders continue, then you get another 80,000 tonnes for the June quarter. Then you've got to start pushing your business towards over 20,000 a month in production and hopefully, the logistics chain stacks up. But it sounds like logistics is your bottleneck, and your business needs to run at 20,000 plus to 25,000 a month, if you can get the logistics chain to work. Is that what you're trying to tell us?

Yes. Otherwise, backlog persists. So clearly, we're trying to work through that backlog and have the logistics chain support us, increasing production as quickly as possible to work through the backlog and continue to satisfy new spot demand. So yes, that's what we're saying. We're looking to try to lift that production rate as soon as the logistics support in there.

And it is at 80,000 tonnes and if logistics chain doesn't come through and you ship it in the June quarter and the September quarter, are they priced on today? Or is it priced on delivery, because obviously, the price in 6 months' time would be much higher, and we don't want to be thinking you're getting this big price lift on orders that were placed yesterday.

The weighted average price is a mix of pricing mechanisms, some of which were fixed at the time contracts were put in place, some of which more related to timing of shipments. There will always be a lag and a difference between spot market price assessments and what our weighted average looks like across coarse and fines as well as the timing of prices being settled. But that is a clear strategy that we've had in place to ensure that we have a mix of mechanisms and a mix of different contract types, so that we're not fully exposed to changes one way or the other in price all at the same time with every counter party.

Okay. That's clear. And just the difference between the breakbulk out of Pemba and containers out of Nacala. You're selling everything on a CIF basis. Can you talk to me about the freight differential shipping breakbulk versus container and how that market is looking at the moment, the 2 freight rates?

Yes, I think both shipping markets have been elevated, there's no doubt about that. The single biggest issue for us has been the constraint of availability over rate because spot market prices were increasing for the product faster than freight rates and we just couldn't get enough capacity out of Nacala. So clearly, the economics around breakbulk are different. The cost structures are different. We have a shorter land logistics leg, different contracting requirements around warehousing, stevedoring, et cetera, compared to container packing, but those economics have been taken into account. And clearly, at the moment, it makes economic sense from a freight rate perspective and the overall logistics costs to be undertaking these types of shipments. And one very positive thing about this is if you're developed successfully, it opens up greater logistics opportunity for us in the future, and it gives us exposure to slightly different cycles that occur through bulk shipping markets and container shipping markets. So it could be very useful to us as we continue in future.

Can you put a quantum around 1 versus the other, breakbulk shipping versus container? What's the dollar per tonne figure, please?

Well, what was said so far around the container freight rates on a per tonne basis is that most of them have more than doubled through this period of disruption. Clearly, some time ago, we were talking about an average of around $50 a tonne on a container basis. It's significantly above $100 on average across our destination suite and the component of breakbulk freight. It's not directly comparable because of the other logistics costs, but at the moment, certainly competitive with those levels.

Okay. And then just 1 final question. Just inventory, obviously, it sounds like graphite inventory is quite low. But do you have any visibility and sense on your customers' inventory of anodes and even batteries in the chain? Or do you think the whole chain is quite low?

Look, I wouldn't comment too much on the battery side. But certainly, on the anode side, you've got a situation where production rates are at record levels in China. You have constraints on input raw material supply. You have constraints on production capacity utilization. So in Australian situation where the Chinese anode material producers have actually produced at record levels, but to do so, they've had to push really hard to satisfy demand downstream. And in doing so, they've really put pressure on their raw materials inventory. So I think there is potential challenge there in terms of availability of anode material supply as we head into 2022 on a couple of those factors around power disruption, availability of input material from the natural graphite side. Anecdotally, of course, we hear the pressure from the cell supply side that's been caused by both cathode materials and now starting to come through on the anode material side.

There are no further questions at this time. I'd now like to hand the conference back to Mr. Shaun Verner for closing remarks. Please go ahead.

Well, thanks to everyone for the attention to that. And as I said, we look forward to keeping everybody up to date. And as we work through our final investment decision processes for Vidalia and keep everyone up to date, it's a very positive evolution of the upstream market. But thanks very much for the attention.

Thank you all for dialing in. You may all disconnect. Have a great day, and goodbye.