Syrah Resources Limited

SYR Details

Agreement with Tesla Inc.: Syrah Resources Limited (ASX: SYR) is engaged in the production of natural graphite products from the Balama Graphite Operation in Mozambique. As announced on 23 December 2021, the company has reached an offtake agreement with Tesla, Inc. to supply natural graphite Active Anode Material from its vertically integrated AAM production facility in Vidalia, USA.

• As per the terms, Tesla would offtake the majority of the proposed initial expansion of AAM production capacity at Vidalia at a fixed price for an initial term of four years, which is beginning from achievement of a commercial production rate.
• The said agreement gives a foundation to SYR for commencing the initial expansion of Vidalia’s production capacity. In addition, SYR intends to make a final investment decision for construction of this expanded facility in January 2022, which is subject to financing commitments.

Market Scenario:

• During Q3FY21, there was continuous growth of 111% in EV Sales to over 1.6 million units over Q3FY20, which indicates a positive momentum for the company’s business.
• In addition, the company is likely to be benefited from the strengthening rate of battery capacity commitments and vertical integration of the EV supply chain in the USA.

Q3FY21 Financial and Operational Highlights:

• During the quarter, the company recorded graphite production of 25kt at a recovery of 82% against 29kt at a recovery of 76% in June 2021 quarter.
• The company sold and shipped 18kt of graphite, with 12kt delayed from September 2021 to December 2021 quarter.
• At the end of the quarter, the company had a cash balance of US$74 million.

Graphite Production (Source: Analysis by Kalkine Group)

Key Risk:

• Shipping Market Disruptions: The company’s operational and financial performance could be impacted by ongoing disruptions in global container shipping market which is expected to moderate through December 2021 and March 2022 quarters.
• Price Risk: The demand and price of natural flake and spherical graphite is highly dependent on several factors, which mainly include international supply and demand of graphite and substitutes, and the price and availability of substitutes.

Outlook:

• The company recorded decent growth in sales order book with over 50kt of natural graphite sales orders in the December 2021 quarter. This indicates robust underlying demand conditions and forward contracting.
• The company believes that the EV sales growth and constructive demand environment for anode material has balanced the natural graphite market for Q4FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SYR is trading near to its 52-week high level of $1.795. The stock has provided returns of ~36.97% and ~38.13% in the past one month and three months, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of high-single-digit (in % terms). The company can trade at a slight premium to its peers’ average EV/Sales multiple, considering the positive natural graphite market conditions, and decent order book, etc. For the purpose of valuation, peers such as Allkem Ltd (ASX: AKE), Western Areas Ltd (ASX: WSA), Mineral Resources Ltd (ASX: MIN), and others have been considered. Considering the expected correction in the valuation, solid rally in the past months, current trading level, and key risks associated with the business amid current market volatility, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $1.760 as on 23 December 2021, 11:18 AM (GMT+10), Sydney, Eastern Australia.

SYR Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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