2017-11-18
Nov. 17, 2017 - Syrah
Resources will be starting production at its Balama mine in Mozambique later
this year. In the base metals industry, Balama’s 355,000 tonne per year
capacity would be considered average, but in the graphite industry, it is a
giant.
In this article, I review the status of the Balama mine, the prospects for
Syrah Resources and the likely effect on the balance of world graphite supply
and demand.
Graphite prices have risen 20 to 30% over the last six months, following a drop
earlier this year. The price increase has been attributed to a combination of
increased demand and reduced supply.
In September, steel production, the biggest market for natural graphite was up
by 5.6% year over year, increasing the demand for natural graphite for refractories
and recarburisers.
Graphite is also a major component of lithium-ion batteries. Historically,
batteries have only been a small component of the overall graphite market, so a
large increase in battery demand has only had a minor impact on demand for
graphite. However, the torrid rate of growth in battery production for the
automotive industry (as illustrated in the chart below) means that battery
applications are quickly becoming a significant consumer of both natural and
synthetic graphite.
Another factor in the additional demand for natural graphite is the trend
towards use of a higher percentage of natural versus synthetic graphite in
batteries. Synthetic graphite prices have risen dramatically as a result of
steel industry growth and a shortage of petroleum coke (the raw material for
most synthetic graphite), so this trend is expected to continue.
In addition to demand increases, supply has also been constrained by mine
shutdowns and tighter environmental restrictions in China.
However, the recent price increase may be short-lived, because of a huge
increase in supply is expected in 2018. Syrah Resources is about to start
production at its Balama mine in Mozambique.
Mine and process plant development
Syrah has been providing photographs of the progress at the site along with
regular updates during the construction of the Balama project.
Front end
commissioning and infrastructure is completed.
First production of intermediate flake and fines product has been achieved.
First production of bagged, saleable flake product is expected in the second
half of November 2017.
A video from October of this year shows a plant that is very close to
completion. Production is about 3 months behind the earlier forecasts, which
gave an expected start-up date in August of 2017.
Capital costs are coming in at $US210 million versus an estimated cost of
$US138 million in the feasibility study (published in July 2015). The 50% cost
overrun is disappointing, but not a disaster. Syrah has been able to raise cash
to cover the extra cost, which is not significant when amortized over the life
of the mine.
Future production
Production for calendar year 2018 is expected to be between 160,000 and 180,000
tonnes with the production ramp up skewed towards the second half of the year.
Calendar year 2019 production is expected to be between 250,000 and 300,000
tonnes subject to global market demand, with an eventual ramp up to the
nameplate capacity of 350,000 tonnes per annum.
The chart below gives a good indication of just how big this mine is, and how
much of an impact it will have on the graphite market.
Flake size |
Price |
% contained in Syrah ore |
Basket |
XL flake (+50 mesh) |
$1,750/t |
8.5% |
$148.75 |
Large flake (+80 mesh) |
$1,150/t |
12% |
$138 |
Medium flake (+100 to -80 mesh) |
$950/t |
11.5% |
$109.25 |
Small flake (-100 mesh) |
$700/t |
68% |
$476 |
Basket price |
$872/tonne |
Syrah’s
major problem is its poor flake size distribution. With 68% of product in the
small flake category, its average selling price is going to be lower than most
other operations.
Based on today’s graphite prices, operating margins will be around $572/tonne
at full production, about 22% lower than the value used in the feasibility
study. The post tax NPV will be closer to $US900 million, roughly equal to
Syrah’s market cap. Based on that, I conclude that Syrah is fully valued and
there is not much upside to its current share price.
Proposed spherical
graphite products plant
One possible value driver could be the proposed spherical graphite plant, which
Syrah intends to build in Louisiana. Spherical graphite is a modified form of
natural graphite that is used in the anodes of lithium ion batteries. A number
of potential graphite miners are looking at adding spherical graphite plants to
enhance the value of their mining projects.
However, I am skeptical of this approach. In a previous article, I criticized both Alabama Graphite and Graphite One for using a proposed spherical graphite plant to make a non-viable mining operation look as though it was viable.
There are several manufacturers of spherical graphite in Asia, and the capital required to build or expand an existing facility is relatively small. Raw material (graphite concentrate) can be purchased, so there is no real barrier to entry. In spite of the high rate of increase in demand, there will always be competition that limits prices and profits.
In Syrah’s case, I also question the proposed location of the spherical
graphite plant. Syrah has already lined up potential customers in Japan and
Korea. It does not seem to make sense to transport graphite from Mozambique to
Louisiana for processing, and then ship it back to customers in Asia.
What does this new
mine mean for other potential graphite suppliers?
It
is possible to make small flakes from large ones, but it is not possible to
make large flakes from small ones, so the oversupply will always tend to be in
the smaller flake sizes, as reflected in the price table above.
Syrah’s product mix will very likely depress prices even further in the sub-100 mesh flake sizes, but not so much in the large flake sizes, so look for opportunities among companies that have a high percentage of large flakes in their concentrate.
The table below compares the flake size distribution from Syrah, and four other potential producers. Northern Graphite, Kibaran, Magnis and Mason Graphite.
All of the above companies have completed feasibility studies for their proposed mines.
Since Mason’s product mix is very similar to Syrah’s, it seems that Mason will
be the one company to suffer most from an oversupplied market. I wrote about
Mason two years ago. Since then, Mason’s share prices have climbed steadily,
and graphite prices have fallen. Mason’s market cap now exceeds the NPV of the
project, which indicates to me that Mason is now significantly overvalued.
The progress of both Kibaran and Magnis has been stalled by changing
regulations in Tanzania. I will take a closer look at them when the situation
is more clear.
Northern’s progress seems to be stalled by a lack of financing. However, they
have been doing more process test work and have been able to produce even
better flake sizes and higher purity. They also claim to be able to reduce
capital and operating costs compared to their feasibility study. I have
Northern on my watch list awaiting an update on this claim.
The graphite space is very crowded, there are nearly 200 companies with
identified deposits in various stages of study. The ones that succeed will
probably be the ones that can produce the high flake sizes, that do not compete
with the giant Syrah mine.
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