Syrah Resources Limited (SYR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Syrah Resources Q3 Quarterly Report Update. [Operator Instructions] I would now like to hand the conference over to Shaun Verner, Managing Director and CEO. Please go ahead.

Good morning, and thank you for joining us on the call today. With me is our CFO, Steve Wells, and we'll use the presentation released along with the quarterly report to work through today's call. Starting on Slide 3. The third quarter of 2026 saw the delivery of very strong operating performance during the production campaign at Balama, with higher production volumes and excellent recoveries. At Vidalia, we commenced the ramp-up of commercial operations for inventory build ahead of targeted first commercial anode material sales in the December quarter, subject to final customer qualification. Earlier this week, we confirmed that our Mozambique subsidiary, Twigg, will shortly receive a USD 15 million loan disbursement under the DFC loan, which will provide the Balama operation with additional working capital funding. This is an important step in continuing to advance the implementation of the strategic funding proposals announced earlier this year. This is also particularly relevant as we seek further market support and policy certainty that would incentivize greater evolution in supply diversification away from China sources of natural graphite and anode material. The long-term strategic importance of graphite and Syrah's position within the supply chain are positive. Further policy support catalysts are still critical and an anticipated driver as ex-China buyers move to reduce their reliance on Chinese-dominated supply. However, slower progress on the demand side policy development has contributed to relatively subdued market conditions and price sensitivity among natural graphite feedstock customers and anode material consumers during the third quarter. Combined with increased activity from Chinese-operated graphite suppliers in Africa, this continued to weigh on overall demand for Balama's fines products. However, graphite and anode demand is expected to grow significantly in the medium term, and these materials are essential to downstream automotive, energy, defense and technology industries that generate hundreds of billions of dollars in value globally each year. Customers are still seeking secure and sustainable alternative supply over the medium and longer term, and Syrah is core to ensuring these highly valuable industries are less vulnerable to disruption outside China. Meaningful and durable government policy support, both on the supply and demand side, is crucial to developing ex-China supply chains, incentivizing greater critical mineral sourcing diversification and growing Syrah's sales volumes specifically. And we are very active in highlighting existing supply concentration and in advocating for policy development. We're seeing such developments in other critical minerals markets where government support is having a clear positive impact on both purchasing diversification and capacity expansion outside China. The cost to governments and customers of not supporting such development would be high, demonstrated by IEA analysis in its 2026 critical minerals outlook, estimating that over USD 300 billion per year of downstream production outside China would be at risk if battery-grade graphite trade with China were meaningfully disrupted. Our established capacity provides great opportunity as a key partner for customers and governments in building a resilient graphite and active anode material supply chain. On Slide 4, we turn to an overview of Syrah's performance in the third quarter. Mining and plant operations at Balama ramped up for a production campaign during the quarter in response to stronger contracted demand. Operating performance was very positive with over 19,000 tonnes of graphite production at 88% recovery. The high plant recovery performance reflects a multiyear operational improvement program, which has enhanced flotation and process control, equipment reliability, blend optimization and built workforce capability. Natural graphite sales in the quarter totaled 18,000 tonnes, which included a large volume breakbulk shipment to Indonesia for consumption in the ex-China anode material production and for which payment was only received after quarter end. We also commenced natural graphite sales to POSCO Future M under the Balama long-term offtake agreement during this quarter, and that's an important aspect of future demand. Our weighted average sales price in the quarter was $583 per tonne CIF, and this was down on the prior quarter due to a higher proportion of fines in the sales mix. We expect to continue shipments to ex-China destinations supplying active anode material producers in the December 2026 quarter as well as ongoing container shipments largely to industrial customers outside China. These container shipments are primarily for our coarse flake products where we continue to pursue greater market share and price maximization. At Vidalia, we commenced the ramp-up of commercial operations to build anode material inventory. This is being done ahead of the expected commencement of commercial sales in this December 2026 quarter when we anticipate completing final customer qualification. Vidalia now has a solid foundation for the transition from qualification campaigns to continuous production and ramp up to commercial operations, subject to the final go-ahead from our major customer. At this stage, we expect Vidalia anode material production to increase to a sustainable breakeven cash flow level from the June 2027 quarter. At the macro level, global electric vehicle sales have recovered from a slow start in 2026, but growth rates are uneven with strength in certain ex-China markets, partially offset by weaker year-on-year sales in China and North America. Overall, global EV sales grew 6% in the second quarter year-on-year. Ultimately, this bodes well for improved upstream materials demand in the months ahead, underpinning growing demand for ex-China products. We continue to deal constructively with a highly complex mix of policy, commercial and technical factors across natural graphite feedstock and anode material markets. We remain singularly focused on accelerating sales in these markets. Strong progress in anode material qualification activity this quarter demonstrates both that there is domestic demand in the U.S. for near-term sales and that customers still expect the policy environment to develop towards domestic sourcing requirements, facilitating Syrah's commercial progress. China's ability to use export license controls to more broadly impact global graphite and anode markets and the potential for U.S. tariff and investment policy to favor products produced in the U.S. and allied countries mean that buyer sensitivities should see greater ex-China demand growth in coming years, with timing the somewhat unknown factor. We emphasize the extensive operating and commercial experience that Syrah has built and our asset investment, demonstrating the considerable time and capital required for others to follow into this market, which should create a sustainable lead time advantage for Syrah as policy and market uncertainties are resolved. Moving on to Slide 5. And before I hand over to Steve to talk about the financials, I wanted to cover safety and sustainability performance across the company. As we continue to develop as a leading ex-China critical minerals producer, we're guided by 3 core objectives: being positive for the communities in which we operate, being sustainable for the environment and providing secure high-quality supply for our customers. In the third quarter, performance against our key safety and sustainability metrics demonstrated the strong commitment of our teams to operating safely and ensuring that we continue to meet social, environmental and governance expectations. The health, safety and security of our employees and contractors will always remain Syrah's highest priority. And in Q3, our total recordable injury frequency rate remained at 0 incidents per million hours worked for the second quarter in a row. And this is a real credit to our site leaders and every employee and contractor remaining focused on safety throughout the operating and maintenance periods of Balama's campaign operations and through Vidalia's operations ramp-up. Our safety focus is underpinned by our work on critical risk hazard management and in-field leadership interactions, which are a daily priority. Congratulations to our teams for this very strong outcome, and we're highly motivated to maintain performance and continue to refine our operational risk profile. Syrah's operations are also clearly aligned to leading global sustainability and governance standards. Our IRMA 50 level of performance for sustainability and commitment to external audit and accreditation processes, including ISO standards, are critical differentiators. We continue to highlight our commitments to operational, environmental and tailings governance compared with other sources of graphite product supply, which we're convinced that over time will lead to stronger preference for Balama and Vidalia products. Syrah has invested a decade towards strengthening this differentiated sustainability performance and in reducing the global warming potential of integrated anode production to a level significantly below Chinese benchmark supply alternatives. This makes Syrah the most sustainable source of integrated natural graphite anode material available at scale today. And you can read more about Syrah's sustainability performance and progress in the quarterly sustainability report, which will be released on our website today. With that, I'll hand over to Steve to talk about our current financial position and some updates to operating cost guidance. Steve?

Thanks, Shaun, and good morning, everybody. Before we talk to the cash position, I'll note the $581 per tonne operating cost for Balama for the quarter during the operating periods highlighted on Slide 4. In the quarterly activities and cash flow report released today, we have updated our guidance on Balama operating costs during campaign periods to $500 to $550 per tonne, which reflects the intention to produce 20,000 tonnes per campaign during those operating periods, compared to the 19,000 tonnes produced during this most recent campaign production period, so effectively in line with that. A key driver of the elevated cost is direct fuel costs, which have increased 34% and has also had an indirect impact on other costs, including transport and logistics, and services and consumables amongst other inputs. Labor cost has also increased, reflecting a broader inflationary environment in Mozambique. While in the short term, we are also transitioning to ownership of the equipment required for mining operations at Balama, which is initially a higher cost at lower overall production volumes but a better long-term model for the company. From a medium-term perspective, under which we assume we are producing continuously at 20,000 tonnes per month, we have revised Balama cost guidance from $430 to $480 per tonne to $480 to $520 per tonne, reflecting similar drivers to the shorter-term cost pressures referred to above, but assuming some normalization of direct fuel costs. At Vidalia, we've increased our cost guidance about 10% to $4.85 to $5.25 per kilo of active anode material, largely as a result of labor and analysis-related costs and also a pass-through of the higher freight costs from Balama. I'll now turn your attention to Slide 6 to cover the cash flow. We started the quarter with USD 98 million in total cash across restricted and unrestricted cash balances. Our net cash outflow from operations during the quarter was USD 19 million, inclusive of USD 5 million of customer receipts and an USD 8 million Section 45X tax credit, which is also cash received. The credit is an advanced manufacturing production credit under Section 45X of the U.S. Inflation Reduction Act related to the 2025 tax year. Operating net cash outflow in the quarter was in line with the June 2026 quarter, noting also an additional $5 million payment for a large volume breakbulk shipment, which was only received in October. At the end of the third quarter, the company had a closing cash balance of USD 76 million. Of this closing balance, $21 million of unrestricted cash and $55 million of restricted cash under both U.S. government loans. And of that restricted cash, $10 million is available to fund Balama operating and capital costs and restricted cash of $20 million is available to fund Vidalia costs. Commitment of further liquidity for the company under the nonbinding strategic proposals received in March 2026 has taken longer than anticipated to implement. However, as announced earlier this week, our Mozambique subsidiary, Twigg, will receive a USD 15 million disbursement from the DFC loan shortly to support working and sustaining capital at Balama. The market and policy conditions Syrah experienced in Q3 remain challenging and continue to demonstrate exactly why this multi-element strategic funding proposals were pursued earlier this year. The development of ex-China demand and capacity in a China-dominated market requires funding, customer and policy support, and our deep focus on these elements has been critical in navigating conditions to date. And with that, I'll hand it back to Shaun.

Thanks, Steve. Moving to Slide 7, which outlines the U.S. government policy initiatives that are developing to support Syrah's position, noting that despite the negative ITC outcome back in March, the extensive Department of Commerce investigation through 2025 found widespread Chinese product dumping and subsidization harming the development of sustainable U.S. domestic anode demand and capacity. These Chinese actions continue today, and Syrah is, therefore, advocating strongly for policies that address prejudicial pricing practices and oversupply from China to level the playing field globally. During the quarter, U.S. trade policy developments continued to focus on reducing dependence on Chinese critical mineral supply chains with graphite identified as a strategic focus. Existing U.S. Section 301 tariffs on Chinese graphite remain in place and are considered relatively durable, while additional policy measures targeting Chinese graphite anode material and precursor products continue to be evaluated. The evolving policy environment reflects bipartisan support for strengthening domestic critical mineral supply chains and improving supply security for battery materials in the U.S. The key potential catalyst is the ongoing U.S. Section 232 investigation into processed critical minerals and derivative products. The U.S. administration is progressing negotiations with trading partners and has indicated that graphite remains a priority. Potential outcomes include minimum import price mechanisms, tariffs or other measures designed to support both targeted domestic demand and facilitate investment in domestic allied supply capacity. Updates from the Section 232 review process are expected during this quarter, this December quarter of 2026. Recent U.S. trade proposals have included exemptions for natural graphite imports under certain tariff actions, reflecting the current absence of domestic natural graphite mining capacity in the U.S. Syrah continues to engage with U.S. policymakers and regulators on immediately available additional supply of natural graphite from Balama and anode material from Vidalia, as well as our expansion potential. The U.S. government is incentivized to support local anode manufacturing capability for unfettered access to critical industrial inputs and to protect the U.S. market from China trade practices. There are many current and potential policy levers that are supportive of Syrah, which include existing tariffs on Chinese anode material imports, Section 45X production tax credits at for Vidalia estimated at USD 6 million to USD 7 million per year prior to their phase down after 2030. The potential to specifically require ex-China supply of anode material to enable battery manufacturers and auto OEMs to continue to qualify for 45X tax credits of their own, which are currently delivering over $1 billion each annually to the major players and underpinning their profitability. There are volumes into the U.S. government's Defense Logistics Agency tender for natural graphite and potential Project Vault stockpiles demand, and the U.S. Department of War supplier financing and non-PFE critical minerals sourcing requirements into military applications where Syrah has been advancing customer discussions along with supply into nuclear applications. Further implementation of such policy positions improve the economics of producing anode material in the U.S., directly benefiting Vidalia and strengthening demand for Balama feedstock globally. Looking at the right-hand side of this slide, expected ex-China demand growth for lithium-ion batteries remains attractive and U.S. existing demand and future growth will require a greater proportion of ex-China supply of anode material to ensure supply chain security and to maintain cell and auto manufacturer eligibility for the tax incentives I mentioned earlier. On Slide 8, we provide some additional details around the outlook for our operations and business overall. We are ready to increase production subject to market demand as the ex-China markets stabilize and grow. Over the medium term, ramp-up of Balama to targeted levels is dependent on both meaningful policy developments, which are expected to enhance support for ex-China demand and producers, and overall market growth in both the industrial and battery segments. And these will obviously be the key factors in the timing of positive cash flow from Balama. At Vidalia, we have commenced the ramp-up of commercial operations to build salable anode material inventory, and we expect the commencement of commercial anode material sales in this December quarter of 2026. Our expectation remains for the transition to positive operating cash flow from the Vidalia operation from mid-2027 onward. Finally, as outlined earlier, we're working towards completing the strategic funding proposals designed to provide flexibility and certainty to ramp up our operations towards targeted levels and continue to develop the business. And I'll close with a comment on some key aspects of our investment proposition on Slide 9. We have a clear advantage in natural graphite and active anode material markets as the first integrated mover for commercial scale supply outside China. No other company today has both an operating graphite mine and integration with a fully operational commercial scale anode material facility positioned to supply into the U.S. domestic battery manufacturing market. We strongly believe that this will deliver advantage over time, particularly considering that other new projects have long lead times and very significant capital and qualification requirements ahead of them. Secondly, Balama is the largest and highest grade natural graphite resource and operation outside China. Its scale and ore quality give us meaningful optionality as demand grows and where ex-China customers prioritize diversification, both for natural graphite feedstock in industrial and battery markets and for integrated anode material production. Importantly, we are advancing the implementation of the strategic funding proposals we announced in March to provide meaningful balance sheet support to the business. And lastly, we continue to develop our engagement with ex-China market stakeholders and push for aligned U.S. government policy development, both through our lenders at Development Finance Corporation and the Department of Energy and with other departments and jurisdictions focused on critical mineral sourcing developments and supply chain independence. The undeniable importance of Syrah's assets in securing critical mineral supply is evident to U.S. industrial, government and battery supply chain stakeholders. Thanks for joining us on the call today, and we're happy now to move to questions.

[Operator Instructions] Your first question comes from Regan Burrows with Macquarie.

Just interested, obviously, performance at Balama has improved, which is good. But just sort of curious as to the scenarios that you'll be sort of running at a 20,000 tonne per month rate? And what do you need to sort of get to that level?

Thanks, Regan. Obviously, continuing demand growth for the fines product is the key driver to get up to that level. And the primary demand segment for that is supplying into the anode material industry. So obviously, we continue to target growth in supply to Indonesia, into POSCO, as well in South Korea into our own operation at Vidalia as that ramps up. And we obviously continue to look at the other potential ex-China operations that are coming on as well as continuing to develop the ex-China industrial markets as well. But it's really the anode material markets outside China, which will drive that demand increase.