Editor’s note: This article is part of InvestorPlace.com’s Best Stocks for 2019 contest. Eric Fry’s pick for the contest is Syrah Resources (OTCMKTS:SYAAF).
The Second Electric Revolution is underway. This revolution is taking several different forms … and it’s offering a variety of investment opportunities.
That said, finding the best way to invest in this mega-trend is a mega-challenge. Here’s why:
- Many of the companies leading the electrification boom are Chinese, and their stocks trade only in Shanghai or Shenzhen.
- Many market leaders in the battery and electrification industries are subsidiaries of much larger companies, so there is no way to invest in them directly.
- Many market leaders are actually losing money. Tesla (NDAQ:TSLA) is one high-profile example, but it is hardly alone. Innovation is both expensive and risky.
- The electrification boom is a battleground of competing technologies and continuous innovation. Today’s market leader could be tomorrow’s Betamax. I refer to this dynamic as “first-mover disadvantage.”
For these reasons, I focus primarily on the companies that are providing essential resources to the electrification boom. Next-generation electrification technologies require large quantities of “battery metals” like lithium, cobalt, copper and nickel.
The average electric vehicle (EV), for example, uses almost half as much copper as the average American house. That’s why, generally speaking, I believe select “low tech” mining companies provide a better play on the electrification boom than “cutting edge” companies like TSLA.
One of the most compelling investments in the mining sector is Syrah Resources (OTCMKTS:SYAAF). And because of its leading position in the industry, it is also my pick in InvestorPlace’s Best Stocks for 2019 contest, which I am thrilled to be joining this year.
Graphite Is Gold
This up-and-coming Australian company operates the world’s highest-grade graphite mine. It’s called the Balama Mine, and it sits in Mozambique — home to about 50% of the world’s known graphite reserves. Nearby South Africa holds about 25% of the world’s reserves.
Even though graphite has not attracted as much attention as other “battery metals,” it is just as essential for current battery technologies — perhaps even more essential.
All four of the leading EV battery technologies use slightly different combinations of metals to create their cathodes. But the anode material in all four is 100% graphite. That makes graphite “agnostic” about which battery chemistry becomes the most popular or prevalent.
Syrah’s Balama operation, which came into production a few months ago, contains a vast graphite resource with a projected mine life of more than 50 years. According to Mining Global, Balama possesses such enormous potential that it could provide 40% of the world’s natural graphite within three years.
That’s the good news.
The other news is that SYAAF is essentially a one-mine company, and that mine sits in Mozambique.
Given the recent difficulties that several mining companies have encountered in other African nations like Congo, Mali and Zambia, investing in any Africa-based mining operation might feel too adventuresome for some investors.
That sentiment is entirely understandable. On the other hand, I should point out that Mozambique has maintained political stability for the last 30 years, and it features one of the fastest-growing economies in Africa.
SYYAF Stock Is Benefitting from the Second Electric Revolution
Now let’s dive into the company’s investment profile.
As one of the world’s largest graphite miners, SYAAF is in a great position to benefit from the Second Electric Revolution.
The reasoning is elegantly simple. EVs use a LOT of graphite. Just one of TSLA’s EVs contains about 200 pounds of graphite, which is roughly 10 times the amount of lithium or cobalt it also contains. Therefore, as the EV boom gains momentum, the demand for graphite will soar.
The electric vehicle is not the only transformational technology that’s bursting onto the scene … so is energy storage. The leading energy storage technologies also require graphite. And this source of demand is just beginning to take off.
Bloomberg New Energy Finance predicts that the global energy storage market will “double six times” between now and 2030 — from a starting point of less than five gigawatt hours (GWh) to 305 GWh. An estimated $103 billion will be invested in energy storage over that time period.
So when you add together these two rapidly growing sources of graphite demand — EVs and energy storage — you get an astonishingly large growth projection.
According to SYAAF’s forecasts, the combined global demand for graphite from the EV and energy storage sectors will total at least 650,000 tonnes by 2025. That’s the “base case.”
The “high case” calls for demand to total more than 1.3 million tonnes by 2025.
Demand growth of this magnitude would require a near-doubling of global graphite production from current levels. And more importantly, this demand projection is not particularly vulnerable to future battery chemistry changes.
Syrah aims to play a big role in supplying this future graphite demand. The company is on track to produce at least 250,000 tonnes of graphite next year and then ramp to up to 350,000 tonnes over the following two years.
An Opportunity We Cannot Miss in SYAAF
Despite this upbeat outlook, SYAAF’s stock has been a poor performer during the last several months. That’s because the company has encountered numerous challenges and setbacks this year, which have prevented it from achieving its production targets.
Syrah has overcome those difficulties and is now on track to fulfill the production goals it set for itself one year ago. And yet, the stock remains very depressed. This disconnect has created an outstanding investment opportunity.
As the company ramps up production, earnings should ramp up as well. According to analysts, SYAAF should earn about 5 cents per U.S. share in 2019 and 22 cents in 2020.
Assuming Syrah can achieve earnings of this level, the stock is currently selling for just 6X 2020 earnings. That’s a huge discount.
Obviously, this stock is not risk-free. Many factors could change between now and 2020. But SYAAF’s earnings potential is significant, which means its stock has the potential to produce exceptional returns over the next couple of years.
Eric J. Fry has been a specialist in international equities for nearly two decades. He is known for his extraordinary long-term track record, which includes numerous “10-bagger” calls. And Eric’s track record on the short side is just as remarkable. Now, the author, former hedge fund manager, and world-renowned analyst brings you the power of expensive, institutional-quality research in his recently-launched newsletter, The Speculator. Click here to learn more.