Syrah Resources Limited (SYR) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the Syrah Resources Q1 quarterly update. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your first speaker today to Mr. Shaun Verner. Thank you. Please go ahead.

Good morning, and thanks to everyone for dialing in today. With me on the call is Stephen Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Business Development and Investor Relations. Today, Syrah released its March 2022 quarterly results covering operations, market conditions, the Vidalia Initial Expansion project and the outlook for natural graphite active anode material and their end-use markets. And we'll use the slide deck released today for this discussion. In 2022, year-to-date, Syrah has announced the achievement of pivotal milestones for the company and is strongly advancing towards its objective of becoming a large-scale vertically integrated natural graphite active anode material supplier. The favorable upstream market setting for natural graphite is also translating to high demand for Balama products. Market conditions in the upstream market has strengthened from last year, and is the strongest they've been since Balama's commencement in 2017, with very good momentum in battery-driven demand growth, seasonal inventory lows and supply interruptions, all culminating in strong physical demand and rising prices for natural graphite. This is despite the expected seasonal restart of Chinese natural graphite production through second quarter. Higher growth rates in the electric vehicle market continued to be reported with EV sales at around 2 million units in the first quarter, up almost 80% on an already higher base in Q1 last year and strong demand growth across major global consumer regions. We're now seeing the same levels of EV sales in the quarter that we were experiencing for a full year only 2 to 3 years ago. Total Chinese active anode material production increased to over 90,000 tonnes in March 2022, which was a record monthly level and up over 80% year-on-year as well. The global and regional battery manufacturing capacity pipeline and the resulting active anode material growth requirements are significant and announcements for additional battery manufacturing facilities by incumbents and new entrants provide a great setting to the daily initial and subsequent planned expansions as well as Balama and its strategic position in battery supply chain. All around the world, governments and markets recognize the key role of critical minerals such as graphite and facilitating transport electrification and energy storage development towards the objective of reducing global carbon emissions. This is clearly evidenced in the U.S.A. with the Biden Administration recently invoking the Defense Production Act to support production and processing critical minerals such as graphite, the large capacity battery manufacturing in the U.S., and broader recognition of the importance of graphite, which has not received as much focus as other battery minerals until now. Positive ESG differentiation also continues to increase the importance, with greater understanding and visibility by end manufacturers and consumers, highlight challenges in part of the lithium battery area of supply. Each quarter, we believe in the importance of the Balama asset and vertically integrated anode material facility at Vidalia to the future of this transition. The actions being taken by customers, investors and governments and commercial arrangements being made to Syrah validate the dispute. Continued disruption in the global container shipping industry again constrained Balama production and sales during the quarter. However, in developing and executing on a major logistics disruptions from Pemba, we've mitigated the impact and increased sales. We still have work to do on this front, but we're very optimistic about Balama's future volumes from here. Slide 4 of the deck reiterates our fundamental ESG commitments and performance focus and every quarter, department 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 in supply chain orders we can bring differentiation between incumbent production of anode material and the cells [indiscernible]. We've recently announced a formal investment decision to construct the solar and battery system at Balama. This system is expected to yield a material reduction in carbon emissions and cost benefits by replacing a significant portion of vehicle generation consumption presently used with Balama's power needs. Minviro recently updated the independent life cycle assessment of Syrah's integrated operations from Balama Origin to the Vidalia anode material customer gate in accordance with ISO standards, leading to a material reduction in the estimated global potential of Syrah's integrated operations versus last year's estimate. Again, it's estimated that Syrah's operations exhibit materially lower global warming potential compared with representative natural graphite and synthetic graphite anode material suppliers benchmark in China. Specifically on other ESG outcomes for the quarter, our health, safety and environment performance remains outstanding. The total recordable injury frequency rate Balama was 0.9 in the March quarter, the Balama TRIFR has remained below 1 since late 2018. Our TRIFR at Vidalia was again 0 in the March quarter. We'll now move to some key aspects of the quarterly summary, and I'll hand over to Steve here to make some comments on the corporate position at the bottom of Slide 5 before making some remarks on the market. Steve?

Thank you, Shaun, and good morning, everyone. On the corporate front, Syrah finished the quarter with a cash balance of USD 205 million compared to USD 53 million at the end of 2021. It includes net proceeds from the equity raising of $160 -- $176 million that was concluded during the quarter. Our cash position fully funded without any initial expansion to start production and has provided Syrah with the funding for immediately proceeding with investment in further detailed engineering and procurement and construction activities. We also have sufficient liquidity to fund working capital and capital costs across our group. Excluding net equity raise proceeds, total cash outflows for Syrah were $24 million with the Vidalia cash outflows across operations expansion and technology development of approximately $40 million and the remaining related to Balama and corporate costs. In terms of Balama, we were able to produce at our mineral production site 15,000 tonnes per month or 46,000 tonnes for the quarter. With the addition of our first breakbulk vessel during the quarter, while lower in production, Balama sales of 35,000 tonnes were materially higher than Q4 last year. However, we want to continue to grow sales on the end production, which are pretty constrained by container shipping at this point in time. From a working capital perspective, higher production and sales represents a draw on working capital. However, this will lead to an average sales and net production and was also somewhat offset by affected payments and release on breakbulk shipment. Similarly, there also continues to be a lag between higher shipping costs being incurred at present and increased pricing of tonnes being shipped compared to what we are experiencing on new orders. This will also balance out over time, and there is good pricing break through the order book, which will compensate for the shipping price increases we have seen. Over the short to medium term, we expect shipping costs to moderate with the normalization in the shipping market, while current price support for natural graphite based on market factors being strong. We do note, however, that there is material uncertainty relating to the duration of extended impact from the current China lockdowns. In the current market, we are likely to continue to prepay the potential graphite owners through breakbulk shipments, which will also improve working capital. And we also note the weighted average price for the quarter exhibited its strong upward [indiscernible] and was well in excess of our [indiscernible] entire production volume. As highlighted through the equity raise and proceeds, Syrah is progressing debt funding processes with the U.S. DOE and DFC on funding requirements of the Vidalia and Balama, respectively. As a result of those initiatives and the [ Technical Difficulty ] process, so far costs are higher than raw material in the quarter. Clearly, we see significant benefits to the company in the funding processes and that some of the achievement of the conditional commitment from the DOE in April, we continue to make good progress. Moving to Slide 6 and current marketing conditions. As Shaun noted, the end market ending in 2022 year-to-date has been outstanding with strong momentum in EV production sales globally. And with broad-based metrification of model ranges planned by major automakers this decade, this trend is likely to continue. To underpin this substantial mobility transition, further large commitments are being made to develop EV and invest in manufacturing capacity across the globe, including in North America. Slide 6 shows our the primary leading indicator was the electric vehicle sales. Positive momentum continued in EV sales and penetration in Q1 of 2022. Global EV sales grew were 80% versus Q1 2021 to approximately 2 million units with strong demand growth in China, Europe and the U.S. Year-to-date EV sales growth has been from a high [indiscernible] in 2021. Most forecasters project further increases in EV sales across major geographies through this year, supported by shifting consumer attitudes and more EV models driving adoption, the build-out of charging infrastructure networks and supported government policy. It is worth noting in the context of 2 million EV sales in Q1, as it exceed the full year of sales of EV recently in 2019. EV sales and battery demand growth are feeding up this market anode material as demonstrated by the total time [indiscernible] production increasing to another monthly production record of over 90,000 tonnes in March 2022. The trending on this front has been very strong over the past 18 months and our interactions with variable graphite businesses in China demonstrates robust forward demand. The moment growth is currently targeting supply headwinds with natural graphite production in China being impacted by production and restocking challenges prior to, during and after the seasonal winter outage, and this is significantly reduced feedstock inventory in China and over supply chain. So the full cycle of orders, which already exceed 90,000 tonnes through to the end of the year, come from 80,000 tonnes in December, and despite 35,000 tonnes in sales this quarter suggests that customers have a strong demand requirements and remain concerned about future challenges of natural graphite production availability and the market balance. Turning to slides 7 and 8, these provide the updated picture of the global and regional battery manufacturing capacity pipeline, forecasts and announcements as well as the resulting graphite battery and anode material forecast requirements. The growth ahead for the industry continues to strengthen, providing a very strong backdrop for the company, to increase production capacity utilization of Balama and a great city for Vidalia's initial expansion, a potential subsequent expansion of Vidalia and investigation of a possible European [ AA ] production base in the future. I'll now hand you back to Shaun.

On slides 10 through 14, we moved to Balama's production, sales and logistics performance in the first quarter. The 2 key takeaways from Balama's operational performance during the quarter are: Firstly, the production achieved a minimum target rate of 15,000 tonnes per month over the quarter for the first time in the September 2019 quarter, with a total of 46,000 tonnes produced in total; and secondly, C1 costs were within $430 to $470 a tonne guidance at the 15,000 tonnes per month production rate. The development and execution of Pemba breakbulk shipments supplementing Nacala container shipments enabled significantly higher production in sales levels at Balama this quarter compared to previous quarters. However, quarterly production remained constrained by maximum inventory positions at Balama, Nacala and Pemba and ongoing disruption in the global container shipping market. At Balama, the 46,000 tonnes of natural graphite was produced at 76% recovery and 35,000 tonnes were sold and shipped during the quarter. All 30,000 tonnes of finished product inventory at the conclusion of the quarter was contracted to customers and the forward sales book continues to grow. Product quality was consistent with previous quarters with stable grade above 95% in fixed carbon. Plant recovery of 76% was lower than the recovery achieved in campaign operations during Q4 2021, and this was due to 3 things: higher process variability driven by a lack of space or finished product; secondly, planned maintenance activities; and thirdly, integrating a new cyclone system in the secondary milling circuit, which is already delivering significant operational benefits. While lower than previous quarters, the reasons highlighted, plant recovery was materially higher than when Balama last operated at an equivalent throughput rate in 2019. As I said, Syrah completed a major process improvement project with Balama with the commissioning of the cyclone system to increase liberation and optimize classification efficiency from the secondary milling circuit. The cyclone system formed started the Balama's recovery improvement plan and is expected to yield a step change in recovery capability of the plant. And this has been demonstrated since commissioning of the cyclone system in March and after the quarter end. Our C1 cash costs, FOB Nacala of USD 464 a tonne for the quarter reflects the benefit of fixed costs being spread over an increased production rate and were within C1 cash cost guidance of $430 to $470 a tonne at 15,000 tonnes per month production. The Balama unit costs are to reduce further as the production rate increase beyond 15,000 tonnes per month. We improved shipping options and availability and as recovery improvement initiatives need to be embedded. So as of the final investment decision on a hybrid solar and battery system at Balama, which will be delivered under Build, Own, Operate and Transfer or BOOT arrangements and is expected to reduce Balama's carbon emissions and operating costs and generate attractive returns for the company. We're also currently working through the renewal of our Balama mining services contract to further improve our total cost and performance position. Turning to Slide 13, which contains further detail on the Balama sales and marketing side. As I mentioned, we sold and shipped 35,000 tonnes of natural graphite during the quarter, including 19,000 tonnes in the March month, incorporating our first stock breakbulk shipment from Pemba. While significantly higher sales were achieved this quarter versus last quarter, unprecedented container shipping market disruption continued to impact the company's ability to secure desired containing capacity for Balama shipments from Nacala and match product shipments to very strong underlying customer demand. Breakbulk shipment from Pemba will continue to be utilized to supplement container shipments to increase volumes and 2 further breakbulk shipments have already been scheduled for the second quarter. We've seen very strong demand in port contracting with customers with more than 90,000 tonnes of sales orders to the June '22 quarter and into the second half of 2022 already booked. The weighted average sales price increased to USD 573 a tonne during the quarter and USD 590 per tonne in the month of March 2022, reflecting the strong market conditions. New contracts in the quarter were at prices materially higher than the average basket price, further price support has been evident after quarter end. Fines sales accounted for approximately 79% of overall product sales during the quarter. And the Fines market is consistently exhibiting relatively stronger price growth momentum in the core market, reflecting the different underlying market drivers for each segment, including the record Chinese anode material production coinciding with Chinese Fines supply disruptions. Several major natural graphite processing facilities in China have been negatively impacted by environmental challenges prior to the seasonal winter outage and ongoing COVID-19-related interruptions. With the challenges in the shipping market hindering imports into China, Chinese inventory positions have been rapidly drawn down over winter. Record monthly Chinese anode production rates in conjunction with the supply disruptions and driving very supportive pricing dynamics for the company. Third-party price reporting agencies are publishing significant increases in China domestic natural graphite Fines prices, with reported prices approaching USD 800 a tonne. It's important to note that Syrah's weighted average price achieved may not reflect the spot price as it includes prices to sales under mix spot and term contracts and different pricing and delivery mechanisms. However, as I noted, we're seeing contracted prices increasing strongly to new contracts and spot shipments. Sea freight prices ex China remain strong through the quarter with prices increasing due to strong industrial demand and ongoing supply disruption, including from the Ukraine and Russia. Significant sea freight rate volatility and surcharges are evident caused by international logistics disruptions, fuel costs, COVID-19 restrictions and global trading balances. Syrah's current average shipping unit cost is approximately 3x to 4x the long-term average. And whilst product pricing has improved, it's yet to fully offset the increases in sea freight rates for the company. We're taking actions through the development of the alternative logistics option in breakbulk shipments through Pemba port. Breakbulk shipments from Pemba created an additional export route for the Balama products provides flexibility in managing inventory positions and will enable significantly higher product sales than could otherwise be achieved selling through Nacala port, given the prevailing container availability constraints. Moving on now to progress at Vidalia on slides 15 and 16. So took pivotal steps in its strategy at Vidalia to become a vertically integrated natural graphite anode material supply alternatives, the U.S. and the European battery supply chain participants during the March 2022 quarter and post quarter end. We were very pleased to announce the final investment decision to expand Vidalia's production capacity to 11.25k tonnes of active anode material per annum during the quarter. The company has invested significant time, effort and capital in derisking its entry into the downstream anode material market, including construction and operation of the existing commercial scale qualification facility in Vidalia, typical product development, product qualification with target customers and various phases of studies in engineering on the Vidalia initial expansion. The final investment decision establishes Syrah, as the first mover in the integrated downstream anode market outside of China and is the first step in our objective of delivering fully qualified products into what is a rapidly growing market. Syrah has created a differentiated position by Vidalia that is not easily replicated. Vidalia also assumed a high-caliber team for management of the expansion projects as well as continued operations of the qualification facility. During the quarter, Syrah awarded Worley, a contract to provide construction management services for the Vidalia Initial Expansion projects through an integrated Worley and Syrah construction management team. Detailed engineering on the expansion project was more than 60% complete at the end of the quarter with Worley and construction is progressing within the plan schedule. And after FID, we reassessed the baseline for the project with further construction contracts being executed purchase order in advancing and early-stage site works still underway. The company completed all planned early works for Syrah preparation, including networks, road preparation, temporary power connection and construction and temporary facilities during the quarter. Construction of the 11.25k tonne anode material facility is expected to be completed in the second quarter of 2023. And following commissioning started production is targeted in the third quarter of 2023 with an 18-month ramp-up period to full estimated -- the full estimated production range. Capital costs associated with the Vidalia Initial Expansion project being fully funded from Syrah's cash reserves. We're also making good progress with the U.S. Department of Energy to get funding. We've recently finalized a nonbinding term sheet and announced a conditional commitment for up to USD 107 million in line from the DOE to fund the project following an extensive period of due diligence, part of which is still ongoing. The proposed loan is to be made under the DOE Advanced Technology Vehicles manufacturing program in support of the Biden administration's critical mineral strategy. If finalized, the loans from Syrah would be the first and only ATV loan program since 2011, and the first ever from this program to materials processing facility, highlighting Vidalia's strategic position in the U.S.A. and providing strong validation of the project. We're focused on completing negotiations and finalizing the loan such that advances are well aligned with the capital spending program. The loan will be highly attractive to the company and would allow Syrah to deploy surplus cash to valuable growth initiatives, including further expansion of value a to support expected market growth based on strong core demand indications exhibited through current commercial and technical interactions. We were very pleased as well to announce our offtake agreement with Tesla in December 2021. This agreement was a key catalyst for the Vidalia final investment decision and also contains an option -- traditional volume with a further expansion of Vidalia. Syrah is engaged with multiple additional potential customers on qualification and introduce testing programs are progressing well. Ongoing commercial and technical interactions demonstrate strong interest to the uncommitted volumes from the 11.25k tonne facility and further volumes from any planned expansions. Our target customers are incumbent electric vehicle OEMs and battery cell manufacturers with operations and new developments, primarily in the U.S.A. and Europe. Market growth and segmentation, particularly around localization and ESG, we expect it to benefit Syrah in its commercial engagements with these potential customers. The company's objective is to enter into further commercial agreements to the unlimited volumes before the start of production in Q3 2023 and to use that process to extend support for future expansion of Vidalia. Syrah has significant future opportunity with its combined position at Vidalia and the globally significant graphite resource in operation with Balama. The Tesla option for additional volume, broader customer interest and market evolution have motivated us to assess the potential accelerated larger expansion at the value and will complete this year a detailed BFS to move Vidalia to the production capacity of 45,000 tonnes of anode material per annum. Progression of Vidalia expansion beyond the initial 11.25k tonnes anode material through detailed engineering, procurement and the construction phases would follow the BFS sequentially, subject to Syrah Board approval and customer and financing commitments. North American battery manufacturing capacity is forecast to increase to approximately 400 gigawatt hours by 2026, requiring almost 400,000 tonnes per annum of active anode material. The 45,000 tonne active anode material facility will represent only 11% of anode material required for the North American market at that time. Scaling up on Syrah's downstream business is underpinned by Balama and its results. And the opportunity to consume a significant amount of current design capacity internally over time and to expand Balama to supply third-party customers are important factors in the overall upstream supply demand balance. Even at an expanded 45,000 tonne facility at Vidalia, only approximately 25% of Balama's production capacity would be utilized internally. So to conclude on Slide 22, Syrah is very positive about the period ahead. EV sales growth, the constructive demand environment for anode material and Chinese supply disruption 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. Construction of Vidalia's initial expansion is progressing within schedule and budget. And DOE and DFC loan processes are advancing highlighting the strategic importance in Syrah's integrated operations to electric vehicle and battery supply chains and governance, potentially freeing up liquidity to invest in further growth opportunities. The current market and Syrah's progress demonstrates 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 anode material outside the Asian markets. We look forward to keeping you all up in pace in the company's progress. And with that, we'll move across to Q&A.

[Operator Instructions] But our first question in queue is from Mark Fichera from Foster Stockbroking.

Congratulations on a great improvement in the quarter. I have a couple of questions. Firstly, you mentioned the freight costs being about 3x the long-term average. I think in the last quarter, you mentioned was around $100 a tonne on that trade. I was wondering if you could justify maybe what the freight costs were in the March quarter? And how that sort of panning out for maybe the next quarter?

Yes, the long-term average freight cost out of the land somewhere between $40 and $50 a tonne. So as I said, we're seeing freight cost moving between 3x and 4x that. As for where that's going, I think the major factor impacting potential future freight price is obstruction with the current China lockdown. There is obviously significant delays and disruptions in both loading and unloading container vessels and bulk vessels around Shanghai at this point in time, and that will feed through to challenges in schedules for container lines. And that has been a key factor in seeing increasing rates over the past 12 months. It is interesting, however, to note that there has been a moderation in the overall average freight rate for containers globally, that has come down from its peak over the last month or so. So there is some sign of potential improvement, but that could be further impacted by ongoing disruption in China.

Okay. And just one more from me. Just on the recoveries. You mentioned obviously the issues that affected that. But obviously, you've put in the cyclone system and looking for an improvement there. Can you quantify what you expect for the long-term recovery now? I guess you did -- I think you did 82% in the previous 2 quarters? Are you looking to go beyond that with this modification to the plant?

Yes. The long-term target is above 87% and hopefully, to somewhere around 90%. The implementation of the cyclone is 1 step in the recovery improvement program that we've had in place for a couple of years now. And now that we're back to a more consistent operating revenue really gives us a chance to embed a number of those improvement actions. We expect some good improvement from the implementation of the cyclone in the secondary milling circuit. But the program as a whole, which is both process and change based, we'll see it continue to improve that recovery level to the high 80s and hopefully into the 90% range.

[Operator Instructions] Our next telephone question is from Anthony Barich from S&P Global Commodities.

Just asking about you mentioned that in past market, general market optimism for graphite with increasing EV sales and everything else led to you deciding to accelerate a larger expansion at the Vidalia plant in U.S. So that what capacity that to? And is that a larger expansion than what you've announced just to clarify that, please?

The final investment decision that was taken during the quarter was for the initial expansion to 11.25k tonnes per annum. That is what the Board has sanctioned to this point, and that's what we're underway on construction with being fully funded for. The work that we will do as well concurrently this year is looking at a bankable feasibility study to expand to 45,000 tonnes per annum. The only work that's been sanctioned by the Board at this stage is the feasibility study for that expansion. Once that feasibility study is completed this year, I think we'll be up to the Board to review the outcomes of that and look to potentially sanction in the next phase of development.

[Operator Instructions] Anthony, please go ahead.

Sorry, just a very quick follow-up probably unrelated to that, though. I've heard some other graphite developers that they had reports from anode makers in China at least that there seems to be some shifting from synthetic to natural graphite because of the rising pet coke prices as a result of the Russian war situation. I was wondering whether you've seen any other indirect or direct foreign effects to the graphite market from the whole Russia-Ukraine situation, whether it be supply chain or anything else?

Sure. So the first part of the question related to a move from artificial to natural graphite anode materials. We do see that there's a long-term trend anyway, which may have been, I guess, facilitated by some of the disruption but cost in ESG components are seeing a move towards the higher proportion of natural graphite in the anode in the longer term. So it's a shift that we already saw as being underway. In terms of other disruptions from the Ukraine-Russia conflict, there has been supply challenges out of Ukraine and Russia, and they do supply coarse flake into the European market. that has seen some strengthening of demand and price for coarse flake. So that's been the primary impact. The conflict has impacted shipping availability and on costs over the top of the disruption that's already occurring due to targeting some of the trade play challenges that exist.

[Operator Instructions] There's no further questions at this time. I'd now like to hand the call back to Mr. Shaun Verner for closing remarks.

Thanks very much. We appreciate the participation. We know it's a busy day with a number of quarterlies. So thank you all for dialing in, and we look forward to keeping you updated in the coming quarters. Thank you.

Thank you very much. You may all disconnect, and have a great day. Goodbye.