The Syrah Resources Ltd (ASX: SYR) share price has sunk 30% after cutting its output expectations.
Syrah is a resources business that owns and developed the Balama Graphite Project in Mozambique. In 2018 Syrah produced over 100,000 tonnes of natural graphite in 2018 and is the largest and first major new operation outside of China. Syrah is also progressing its ‘downstream’ Battery Anode Material strategy with first production of spherical graphite achieved in December 2018 from its plant in Louisiana, USA.
Syrah’s Painful Update
Syrah announced today that there has been a sudden and large decrease in spot natural flake graphite prices in China driven by a decrease in the Chinese currency and Chinese inventory levels. This has impacted price negotiations and contract renewals with the possibility of more price weakening in the fourth quarter of 2019.
China imported 105kt of graphite in the six months to June 2019, of which 75% was from Syrah. It’s clear to see the company is very reliant on its Chinese buyers. There have been recent cuts in Chinese electric vehicle subsidies which has dampened short term demand and there has been more supply from Madagascar as well as higher Chinese production. The trade war is also having an effect.
In reaction to this Syrah has decided to significantly reduce its graphite production volumes in the fourth quarter to around 5kt per month. This is a decrease of around two thirds compared to the prior production.
Management are going to perform an immediate review of further structural cost reduction at the Balama Graphite Operation and across the company.
Syrah is also going to conduct a review in 2020, with further details to be provided in Syrah’s third quarter of 2019 quarterly activities update, which is expected to be released on 22 October 2019.
Current cash (around US$60 million) and available liquidity (around US$382 million) in conjunction with a cost reduction program provides Syrah with the opportunity to adjust near term production, according to the company.
Did Syrah Do The Right Thing?
I think the moves made by the company are exactly right. There’s only so much graphite in the mine, so you don’t want to sell it cheaply just for the sake of production. The resource needs to be best managed over the course of the life of the mine. This could be an opportunity for a very brave investor willing to think long term.
But the market is quite short term focused and quick to fear, I can understand why the market was quick to sell off. That’s why I always prefer to own reliable shares in my portfolio like the ones in the free report below.
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