Disclaimer This report has been prepared for educational purposes only. This report and any statements made in connection with it are the authors’ opinions, which have been based upon publicly available facts, field research, information, and analysis through our due diligence process, and are not statements of fact. This document or any information herein should not be interpreted as an offer, a solicitation of an offer, invitation, marketing of services or products, advertisement, inducement, or representation of any kind, nor as investment advice or a recommendation to buy or sell any investment products or to make any type of investment, or as an opinion on the merits or otherwise of any particular investment or investment strategy. Any examples or interpretations of investments and investment strategies or trade ideas are intended for illustrative and educational purposes only and are not indicative of the historical or future performance or the chances of success of any particular investment and/or strategy. As of the publication date of this report, you should assume that the authors have a direct or indirect interest/position in all stocks (and/or options, swaps, and other derivative securities related to the stock) and bonds covered herein, and therefore stand to realize monetary gains in the event that the price of either declines. The authors intend to continue transacting directly and/or indirectly in the securities of issuers covered on this report for an indefinite period and may be long, short, or neutral at any time hereafter regardless of their initial recommendation.
2. The Graphite Market Before we start, we’d like to note how incredibly ambiguous the graphite market is. It’s a niche industry, and as such it has been difficult to source reliable sources for spot prices, demand distribution, etc. Please do your own research. The graphite industry has displayed strong growth in the capital markets, not reflecting currently poor trade-level performance. Industrial Minerals, which Syrah cite on several marketing materials, has reported weakened transaction volumes, excessive inventories and slowing industrial activity in steel refineries which constitute a vast majority of the graphite market. These factors have significantly negatively impacted the price of the commodity. Despite this, China has continued to ramp up steel production as exports remain falling. Graphite Production Correlation with Steel3
China Steel Production4
3 4
http://www.csaglobal.com/wp-content/uploads/2016/03/Paydirt-Media-14-March-2016.pdf http://marketrealist.com/2016/09/what-does-chinas-surging-steel-production-mean-for-u-s-steel/
Graphite Pricing Index5
Another look for completeness, from a different source
Readers can see from the above graphs that while production is increasing, demand is decreasing resulting in a fall in benchmark prices. Opening the world’s largest graphite mine seems badly timed given these weak trends.
Spherical Graphite Syrah has indicated its intention that it will target the growing battery market through production of high-grade spherical graphite.
In order to produce spherical graphite, the raw product must first be pressed into microscopic spheres, which are then coated with a magic solution – we call this the magic sauce. Note this the barrier of
5
http://www.vanadiumcorp.com/images/Benchmark%20Mineral%20World%20Tour%20%20The%20battery%20Supply%20Chain%20in%20a%20lithium-ion%20revolution.pdf
entry into this market is not that the coating technology is highly proprietary, but there is significant waste by-product, efficiency and cost concerns. The pressing of the graphite into spheres is entirely dominated by China. We think this may be because China tends to have more leeway on the environmental side, and this process produces significant quantities of by product (60-70% of input)6. This coating market is currently dominated by Japan and South Korea, as low cost productions in China have restrained the development of this fine art. Syrah has announced that it will develop a downstream spherical graphite processing plant in the USA. Spherical graphite is primarily used in battery production. Investors looking for a similar boom to the lithium markets are in for a rough awakening. The graphite market hasn’t reacted in the same way as the booming lithium market, as prices are still totally dominated by the steel industry. Low steel prices have thus brought the price down further as refinery margins are pushed downwards7:
Syrah has other ideas8:
6
http://www.indmin.com/Article/3238613/Spherical-graphite-how-is-it-made.html http://northerngraphite.com/wp-content/uploads/2014/11/Sept-2016.pdf 8 http://www.asx.com.au/asxpdf/20161213/pdf/43dpgqz6xjmxz5.pdf 7
Chinese spherical graphite production accounts for over 70% of the spherical graphite market based on 2015 figures. Chinese suppliers are logistically better suited to supply key customers which are heavily concentrated in Japan and Korea: Chinese Spherical Graphite Exports9
Although higher revenues can be achieved from spherical graphite, the process has costs and inefficiencies which eliminate the majority of the benefit. We see competitors venturing into this area instead forgoing downstream production or pulling out of investments altogether, including Triton Minerals (ASX:TON) which operated a similar sized mine in Balama and is now insolvent, and Northern Graphite10:
9
http://northerngraphite.com/wp-content/uploads/2014/11/Sept-2016.pdf http://northerngraphite.com/wp-content/uploads/2014/03/SPG-Summary.pdf
10
In its presentation to investors in May 2016, Syrah indicates Benchmark Mineral, another independent journal, estimated 50kt of spherical graphite was supplied in 201511. Roughly a 3:1 ratio is needed to turn flake graphite into spherical graphite. Syrah’s anticipated annualized production of small flake graphite will flood the market with 1.5x current supply. As Syrah will more than double the current market supply whilst competitors are also ramping production, basic economic principles suggest that even low spot prices are too high for Syrah’s NPV. Syrah must brace itself for large inventory build ups or be willing to take a BIG hit on margins.
11
http://www.syrahresources.com.au/application/third party/ckfinder/userfiles/files/02%20Macquarie%20Au stralia%20Conference%20Presentation(1).pdf
3. Basket Prices, CAPEX, OPEX Basket Prices As discussed in Section 2, several sources and data support weakened transaction volumes, excessive inventories and slowing industrial activities in iron refineries. These factors have significantly negatively impacted the price of the graphite commodity.12 High mesh grade supply has not been resilient to the market slump, with +80 mesh (94-97% graphitic carbon) currently traded at ~$800/t a 35% discount to August 2009. Fine grade, -100 mesh (94-97% graphitic carbon) currently trades at $620-$650 per ton13. These current market prices indicate Syrah’s graphite flake and quality mix will yield an average basket price of $655-$701 per ton. SYR “Basket” profile:
Basket profile – Weighted Price Per Mesh Size Per Ton14: Basket Price for Syrah August 2016 +50 +80 +100 -100
Expected Price (high) Price (low) Weighted Weighted production Weight (Aug 2016) (Aug 2016) Price (high) Price (low) 30 8.2% 850 750 170 150 43 11.8% 41 11.2% 750 700 84 79 251 68.8% 650 620 447 426 701 655
We note that prices have not fluctuated significantly since August, or (at least) 3 months prior to August, however we do acknowledge the difficulty of obtaining market data for a surprisingly economically ambiguous industry. This data surprised us because Syrah’s Financial Forecasts actually use a basket price assumption of $1,000 a per ton, 42-52% above the current spot prices. As noted in Section 2, even the current spot price will be too low for Syrah’s NPV assumptions, as its Balama production will more than double the current market supply and likely cause graphite prices to collapse.
12
http://www.csaglobal.com/wp-content/uploads/2016/03/Paydirt-Media-14-March-2016.pdf http://www.indmin.com/Article/3576236/Graphite/Slowgraphitemarketstuntspricerecovery.html?Print=true 14 http://www.indmin.com/Article/3576236/Graphite/Slowgraphitemarketstuntspricerecovery.html?Print=true 13
Another key takeaway from the above table is how little Syrah expects to spend on their initial CAPEX outlay, ongoing CAPEX requirements, and OPEX. Theoretically, we would expect:
Greater initial CAPEX for larger mines. With Syrah and Triton being by-far the biggest mines, they should have the largest CAPEX. They do not. It is noteworthy at this point to note Triton and Syrah both operated near the same geographical region in Mozambique. Triton (ASX:TON) realised they screwed up their model, entered into administration19. Ongoing CAPEX costs are significantly below competitors. Economies of scale would definitely play a factor, however 7.1m appears to be overly optimistic against comps. We would have thought greater CAPEX should theoretically reduce OPEX (i.e. you have better, more efficient equipment). This is sort of hard to test with the data we compiled because, again, factors such as economies of scale through to logistics to mine strip-ratios are not linear. Syrah assumes the lowest OPEX figures amongst its comps. Note that these mines are all extremely large, and we do not believe economies of scale can account for these saving. As described above, Syrah is also very poorly placed logistically. We’ve used the bottom end of all feasibly study shipping costs. Syrah’s best case scenario would only play out if all its graphite was sent to China. We were quoted prices of $105-130 for Japan and the USA. Also, it’s worth noting that China has a 3% import tax for graphite. We find it highly unlikely that Syrah will find economic value in selling to China after duties and shipping costs due to the presumably competitively priced, overstocked local market.
Take your pick from any of the above arguments. Any of them will significantly reduce Syrah’s NPV assumptions.
19
https://www.ferrierhodgson.com/au/creditors/triton-minerals-limited
4. The History of the Business Soil Contamination The prior owner of the Balama site, Helios Resource, reported airborne data which showed a large Uranium anomaly:
The presence of Uranium was further verified in a technical report for Jacana Resourced Limited, which was acquired, then spun off by Syrah. The report is no longer available on Syrah’s website. Why? It’s super important!20:
It also shows, embarrassingly, that Balama was acquired to initially be a Uranium deposit, but a mediocre one at that. Management can spin it whatever way they want. A waste management report conducted by Coast and Environmental Services also identified Uranium in the site, and noted that the radiation was a potential health and environmental risk which must be mitigated21:
20
http://web.archive.org/web/20120320171518/http://www.syrahresources.com.au/J2151 Jacana Mozambi que Technical%20Report.pdf 21 http://www.cesnet.co.za/pubdocs/Syrah%20Balama%20Graphite%20Mine%20Eng%20CB290814/Executive %20Summary.pdf
For number reference; the Earth’s crust is about 1.8ppm uranium22, a low-grade uranium mine is about 100 ppm23, and Syrah’s site ranges from 37-86ppm uranium24. Tech Metals Research25 notes that battery grade graphite requires high purity for effective operation. Samples should be tested frequently, with a full spectrum analysis showing all contaminants, Syrah has never released these tests. Further industry sources we spoke to acknowledge Uranium as a serious contaminant. Syrah claim to have an advantage in making spherical graphite because the small flake size requires less energy to transform, however, in light of these hush-hush contamination reports, we are skeptical that Syrah will be as economic as they claim in their graphite purifying process. Given these contaminants, we believe Syrah will incur further costs in refining its output.
The Jacana Spin-Off Don’t let them fool you – this was a disaster. On 17 July 2014, Syrah stated their intention to offload a number of small Tanzanian assets, a longstanding chairman, and its managing director through the listing of Jacana Minerals. The proxy form sent to shareholders on 1 September 2014 confirmed that, once demerged, the board would seek to list Jacana on the ASX through an IPO26. The Jacana prospectus proposed the issue of $10m equity raise for roughly 50% of equity of the recycled venture, giving it a value of ~$20m27. It would also throw in Tom Eadie and John Kehoe, long standing Syrah directors and large shareholders. The venture was managed by Shaw Stockbrokers, who pride themselves on being privately owned and values independence. It therefore curious why their longstanding relationship with Tolga Kumova, the incoming Managing Director replacing Paul Kehoe, was undisclosed. Tolga heroically shared how he was ‘robbed, bashed and infected’ in Africa simultaneously losing his clients’ money during his 7-year stint with Shaw Stockbrokers. Tolga was apparently an average student, who eventually found himself at Shaw Stockbrokers because he described himself as a ‘poker player’ despite knowing little about the game. We find this ironically reminiscent of the current situation Tolga has found himself in at Syrah. We’ve read this article many times over and are baffled as to why this should instill confidence in the minds of shareholders. http://www.afr.com/business/how-tolga-kumova-was-robbed-bashed-and-infected-before-hestruck-it-rich-in-africa-20130918-jyiem The company failed to raise funds for the IPO. The business was then reverse merged with Strandline Resources in July 2015. Jacana funded the acquisition costs through essentially a non-recourse $250k loan made to Strandline, who offered $5m worth of $0.01 shares to Jacana shareholders. Jacana was $900k net cash. Paul Kehoe promptly sold a significant portion of his stake in Syrah for $57m28
22
https://en.wikipedia.org/wiki/Abundance of elements in Earth's crust http://www.aheadoftheherd.com/Newsletter/High%20Grade%20v%20Low%20Grade.pdf 24 http://www.cesnet.co.za/pubdocs/Syrah%20Balama%20Graphite%20Mine%20Eng%20CB290814/Syrah%20 Draft%20ESHIAR Part2.pdf 25 http://www.techmetalsresearch.com/2016/06/alabama-graphites-coated-spherical-purified-graphite-forthe-lithium-ion-battery-industry/ 26 http://www.asx.com.au/asxpdf/20140901/pdf/42rxzpjs2glfj9.pdf 27 http://www.asx.com.au/asxpdf/20141126/pdf/42v11vkd79rj5w.pdf 28 http://www.asx.com.au/asxpdf/20141125/pdf/42tz1ck4fgrlml.pdf 23
5. Mozambique The Government Syrah will need to be prepared for increased State control in their operations in Balama. The 2014 which introduces the following new requirements29:
29
The right for the State to acquire mineral products to the government “in the public interest”.
The state must consent transfers of shares in the mining title holder either direct or indirect.
http://www.eisourcebook.org/cms/February%202016/Mozambique%20Mining%20Law%202014.pdf
Operators will need to acquire a Mineral Processing License
Limited investment protection. The 2014 Mining Act no longer includes undertakings that the State would not change the tax regime applicable to the operator at the time of granting the mining concession. The 2014 Mining Act will no longer provide indemnity from adverse financial consequences of changes in mining legislation.
The Rebels The Renamo Militia has become increasingly active in Mozambique, attacking government, resident and commercial vehicles in many of the areas where Syrah plans establish its logistics route. The commerciality of this incident should be second to the security of the drivers. There have been no mentions on how Syrah plan to mitigate this enormous risk. Global Rescue have summarized the issue well on their website: https://www.globalrescue.com/landingPages/Member-Advisory/
The Weather The Balama region experiences severe monsoons every year30:
30
https://weather-and-climate.com/average-monthly-Rainfall-Temperature-Sunshine,marrupa,Mozambique
Here is the rainfall distribution. Note that Balama and the route to the Pemba port is severely affected31:
This obviously affects the quality of infrastructure in the area. See below videos to see what we mean: https://www.youtube.com/watch?v=1Cq7d8peYuY https://www.youtube.com/watch?v=Y1vi5MmGADw https://www.youtube.com/watch?v=TQs7tZRQEx0 31
http://floodlist.com/africa/poor-distribution-rainfall-leads-floods-droughts-southern-africa
6. Morgan Hairong & The Magic Sauce Morgan Hairong Syrah announced on 11 November 2015 to be in partnership with Morgan AM&T Hairong Co., Ltd. for use of its proprietary spherical graphite coating technology outside of China, and agreement to supply graphite to China:
We note the following:
The graphite coating industry (especially high end) is dominated by Japan and Korea. Morgan Hairong was offloaded by Morgan Crucible for an implied value of US$640k on 20 June 2014 due to incurring large trading losses. Morgan Crucible completed the purchase of the business in Jan 2011 for approx. US$10m, expecting US$7.5m revenues and ~30% operating margins32. Syrah obtained the rights to use this apparently spectacular technology for an even more spectacular price $1m in shares.
The Louisiana Plant The graphite will be coated in the magic sauce in Louisiana as advised by the company on numerous occasions33:
Naturally, we followed up on this. Our public records request to the Louisiana DEQ returned no plans, permits, or even a Louisiana DEQ Agency Interest Number, which you would need in order to lodge said plans and permits.
32 33
http://www.marketwatch.com/story/morgan-crucible-co-plc-acquisition-2011-01-14 http://www.asx.com.au/asxpdf/20161213/pdf/43dpgqz6xjmxz5.pdf
The only record with reference to Syrah that was found was a meeting attendance register with two Syrah representatives, one of which is the study manager for the proposed plant.
The listed study manager, Peter Barnes, no longer works for Syrah directly according to his Linkedin Profile34:
Peter’s firm, Lateral Solutions Engineering, lists Syrah as their client. We believe then, that either: a. The Study Engineer Manager for the Balama Site has left Syrah; or b. the “Leading Engineering Firm” cited on Syrah’s presentation is in fact, Lateral Solutions Engineering, aka. Peter and a friend. LSE or any abbreviation of the name also does not have any plans listed with the Louisiana DEQ to the extent of our searches. The whole firm website is on the next page…
34
https://www.linkedin.com/in/peter-barnes-7641b840
http://www.lsegroup.net/
7. The Marketing Gimmicks Tesla Syrah’s marketing material is riddled with the premise that the commencement of Tesla’s mass production will significantly boost graphite demand. They are not wrong, but this is also not the whole truth. As discussed in Section 2 of this report, most graphite demand comes from metallurgical and refractory applications35:
Even with exponential growth in the battery market, the increment as a whole would not accommodate demand for Syrah, let alone all of the junior graphite miners. We also see evidence in AGM’s and interviews of Tesla actively moving away from and generally avoiding natural Graphite: “There are some things that are sort of a tricky – or that matter, like for example the anode, the structure of the carbon in the anode is important. I mean we use a very high percentage of synthetic graphite, because that gets sort of a more precise microstructure. And, yes, so there is some potential trade-offs there as to how much work effort you put into creating the synthetic graphite. I think generally we want to probably aim for highly precise microstructures, which is a little trickier to do. You don’t want to just have random microstructures, stuff that came out of the ground.” – Elon Musk, Tesla Q1 2014 earnings call36
35
http://www.vanadiumcorp.com/images/Benchmark%20Mineral%20World%20Tour%20%20The%20battery%20Supply%20Chain%20in%20a%20lithium-ion%20revolution.pdf 36 http://seekingalpha.com/article/2201363-tesla-motors-tsla-ceo-elon-musk-on-q1-2014-results-earningscall-transcript?page=2&p=qanda&l=last
“Even more Ludicrous: Elon Musk says Tesla now has the world's fastest production car” - LA times37:
Benchmark Minerals & Industrial Minerals Group These are the two journals which publish on ‘tech metals’ such as graphite. Graphite, as we mentioned earlier, is a Niche market. Information is not readily available. We respectfully question why are these two perceived as a legitimate source of industry information? Their news sucks! For example38:
There is one quote from Elon Musk in the article:
Somehow, Benchmark spin this information into this!
There is a fine line between being editorial and putting words in someone’s mouth - Benchmark went flying over it in an electric four-wheeler at 160mph. 37 38
http://www.latimes.com/business/autos/la-fi-hy-elon-musk-fastest-car-20160823-snap-story.html http://benchmarkminerals.com/Blog/elon-musk-our-lithium-ion-batteries-should-be-called-nickel-graphite/
We get a much different feel from Marubeni’s market announcement, which indicates that coated graphite is a new venture for the business44:
Another significant omission from the Marubeni disclosure is its alleged obligation to buy the product. Marubeni only states that it has exclusive right to market up to 50,000 tons of the Balama product per year, not that it has agreed to buy 50,000 tons of product every year. Someone has got it wrong.
Pricing and Excess Syrah has released a forecast schedule for its Chalieco sales as follows45:
Chalieco has also provided a summary of the offtake agreement, however it differs significantly from that of Syrah. Chalieco is under the impression that it is buying 80,000 tons of quality flake graphite only, for an expected amount of US$750 per ton46.
44
http://www.marubeni.com/news/2016/release/00033.html http://www.asx.com.au/asxpdf/20150210/pdf/42whqdz86xp0x2.pdf 46 http://www.csrc.gov.cn/pub/zjhpublic/G00306202/201606/P020160624529688475881.pdf 45
Given our analysis in Section 2, we think the market oversupply and increasingly competitive industry will result in spot prices that fall well below Syrah’s optimistic expectations. In reality, the offtake agreement has no pre-established price47:
How can the offtake be binding if it is still contingent on a pricing negotiation? This may be an industry thing (we don’t know), but it seems like either Chalieco or Marubeni can pull out of the deal if they cannot agree with Syrah on an acceptable price. Hypothetically, if these offtake agreements worked out perfectly, there is still going to be a huge production gap! The Chalieco deal secures only 80,000 tons of 350,000 tons of annualized production. The Marubeni deal does not even take off until around 2019. Despite management’s enlightening confidence, we think there is too much excess graphite to be rectally consumed by the board. On the plus-side, we believe there may be significant growth in the graphite fire retardant market moving forward driven by the need to put out fires at Credit Suisse and Deutsche Bank offices.
47
http://www.syrahresources.com.au/investors/downloads/80
9. Sell-side Cheerleading Credit Suisse and Deutsche Bank have, frankly, made a mockery of their investors’ intelligence through their adjective-riddled, factually inaccurate, poetic praise of Syrah’s operations. It is worth noting that CS were lead managers in Syrah’s 2013, 2014 and 2016 share issues. Here is an extract from the latest CS report on 5 October 2016:
However, we note the following:
According to Syrah’s most recent equity raising roadshow presentation, Syrah outlines it is expected to require further funding in order to commence operation of the Balama mine48. CS should know this, they were lead managers for this equity raising. Maybe CS didn’t spot it within the 10 full slides (out of 40) highlighting key risks:
We have no doubt that the reserve is large, however no independent reports (or any reports) on the quality of the graphite have been made available to the market. As highlighted within the Logistics, CAPEX, OPEX section of this report, CSA Global comparatively rates Syrah amongst the worst placed mines logistically. The same graph also shows the quality mix of the graphite is no better or worse than any of its competitors. As a general observation, larger flake graphite yields significantly higher prices than small flake graphite present at Syrah’s mine. As highlighted previously, we are sceptical that Morgan Hairong have the technical capacity to extensively test Syrah’s products.
Here is an extract from Deutsche Bank’s report, also on 5 October 2016:
48
http://www.syrahresources.com.au/application/third party/ckfinder/userfiles/files/Equity%20Capital%20Rai sing%20Presentation-16Jun16(2).pdf
And here is a picture of Syrah blasting its quarry in September 201649, found in Syrah’s Gallery (maybe it was just for fun?):
The AU$194m equity raise On 20 June 2016, Syrah announced it had successfully completed an underwritten institutional placement to “sophisticated” investors to the value of AU$194m. Credit Suisse (Australia) Limited acted as Sole Lead Manager and Underwriter, and Gilbert + Tobin acted as legal advisers, to the Offer50. We thought it would be prudent to examine Credit Suisse’s NPV model to determine how they were able to sell this investment and unsurprisingly came across some major issues in the financial model. We note that the model we used was dated 21 June 2016, a day after the share placement news was made available to the market. The target price per the below summary was $7.80/share: Michael Slifirski michael
[email protected] Nick Herbert nick
[email protected]
DCF A$/sh 3.02 1.48 4.64 9.13
Risk Weighting 100% 25% 70%
Attributable NPV A$mn A$/sh 794 3.02 97 0.37 856 3.25 1747 6.63
A$mn 380 -75 305
A$/sh 1.44 -0.28 1.16
Risk Weighting 100% 100%
Attributable NPV A$mn A$/sh 380 1.44 -75 -0.28 305 1.16
2711
10.29
Operational Balama - Graphite Balama - Vanadium Spherical Plant Sub-Total
A$mn 794 389 1222 2406
Non - opera ional Net cash (31 Dec adj. for Cap. raise) Corporate Sub-Total Net Present Value
DCF
49 50
2052
http://www.syrahresources.com.au/development-activities http://www.asx.com.au/asxpdf/20160620/pdf/437zr27wr6yqfm.pdf
7.79
We note the following which appear to be errors or Credit Suisse’s financial model:
Syrah’s post placement cash balance is included as part of the NPV of the project, despite the cash being sunk into CAPEX and initial OPEX over the next two years. There appears to be an intra-division discount which is not properly consolidated. The raw graphite basket price/ton from the Balama Graphite Mine is $850/t. The raw material cost of the graphite at the mine is $800/ton. We could not locate a consolidating entry to remove the discount from the group profits. Similar to the above, the Balama Graphite Mine NPV analysis shows the graphite is sold FOB, therefore meaning the purchaser is liable for shipping costs. Shipping costs are not included in the spherical plant’s input costs. The efficiency (recovery) rate of the spherical graphite process is noted in the model at 37.5%, however the input-output quantities appear to be incorrectly calculated to output at 50% efficiency. Syrah believes they can sell the by-product of the spherical plant. The income from these sales are included as a revenue item and then double counted as a negative cost item. Industry sources we spoke to advised that spherical graphite producers typically had to pay someone to take this waste product.
An adjustment for these errors bring the target price down from $7.80/share to $2.43/share. The new shares were issued at $6.05c. If it were us that bought into Syrah’s share placement, managed by Credit Suisse, and also rated outperform by Credit Suisse, we’d be pretty pissed off. Michael Slifirski
[email protected] Nick Herbert nick
[email protected]
DCF A$/sh 3 02 1.48 -0 96 3.54
Risk Weighting 100% 25% 70%
Attributable NPV A$mn A$/sh 794 3.02 97 0.37 -176 -0.67 715 2.72
A$mn 380 -75 305
A$/sh 1.44 -0 28 1.16
Risk Weighting 0% 100%
Attributable NPV A$mn A$/sh 0 0.00 -75 -0.28 -75 -0.28
1237
4.70
Operational Balama - Graphite Balama - Vanadium Spherical Plant Sub-Total
A$mn 794 389 -252 932
Non - operational Net cash (31 Dec adj. for Cap. raise) Corporate Sub-Total Net Present Value
DCF
641
2.43
As previously mentioned, the NPV analysis, which draws largely from Syrah management assumptions, is riddled with extremely optimistic assumptions:
Inflated Graphite basket price; Low corporate costs, which appear even more unrealistic given Tolga’s retirement; Low logistic expenses; …
It’s not Credit Suisse’s fault, I would assume they also do not have the feasibility analysis of the Balama mine which would provide greater costing detail. On the flip side, if they did have it, it would probably be insider trading.
Mr Kumova pushed for a revised contract to bump his base salary to $450k per year in January 2016. The contract provisions clearly state Mr Kumova must give 6 months’ notice:
We think it’s pretty obvious there is more to Mr Kumova’s retirement than him suddenly deciding he is not qualified.
11.
Target Price
We have toyed with company assumptions and derived a target price of around $0.70/share, representing an 76% downside to the current price of $2.95 at the time of writing. The major points of difference between our NPV and sell-side NPVs are:
Use of current graphite spot prices; More realistic shipping freight costs obtained through brokers. It does not appear SYR or sellside have appropriately weighted shipping and logistics costs between Balama and the USA spherical plant. More realistic maintenance CAPEX requirements, in line with regional competitors; Sell-side have priced in ~$325m cash on hand into the price target. This cash will be sunk into the production of the mine? We have not priced this cash into our assumptions.
There are several important factors not considered which would drive the price down even further:
Our model assumes SYR will actually be able to sell all of its product. Realistically, we don’t think they will. Our model assumes that, as SYR floods the market with supply, graphite prices will remain constant. The lack of binding offtake agreements at its commencement are of particular concern to short term liquidity and may further drive down the price target. Presume management fees will increase in search for new CEO talent and more enticing, talent worthy salaries.
The end.
12.
Annexure A
Co. Syrah Ticker SYR Annualised production ('0 Initial CAPEX ($m) Annual Capex Req. ($m) Capex/Ton ($/t) OPEX FOB ($/t) Shipping cost ($/t) Basket Price Target Assum Unlevered FCF ($/t) Total unlevered FCF ($m)
Triton TRI 355 137.8 7.1 20.0 286 35 1,000 659 234
Sovereign Kibaran Mason Energiser SVM KNL LLG EGZ Average 223 111 100 52 53 149 120
138
78
161
188
137
29 26 35 46 129.9 233.0 350.0 892.1 338 498 570 376 315 Unknown Unknown Unknown
1.5 27.9 535 182
24 275 434 177
1,689 944 50
1,463 660 98
1,436 624 139
1,303 572 64
1,446 526 53
1,905 637 33
Resources: http://www.syrahresources.com.au/application/third party/ckfinder/userfiles/files/02%20Macquari e%20Australia%20Conference%20Presentation(1).pdf http://www.asx.com.au/asxpdf/20150529/pdf/42yw8p7cjz0gvf.pdf http://www.tritonmineralsltd.com.au/triton-projects/balama-north/nicanda-hill/ http://www.sovereignmetals.com.au/uploads/3/9/7/8/39784071/160615 svm presentation june 2016 final.pdf http://www.kibaranresources.com.au/irm/PDF/1661/EpankoBankableFeasibilityStudyCorporateUpd ate http://s1.q4cdn.com/722223210/files/doc downloads/Mar2016/Mason-Graphite-43-101-TechnicalReport-Resources-Update-and-Feasibility-Study-Re-issued-29-February-2016-v2-(Title-corrected).pdf http://www.energizerresources.com/images/stories/pdf/(v5)C8375-TRPT-001%20Rev%206%20NI43-101%20Technical%20Report.pdf
