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).
Syrah Resources Ltd. (OTCMKTS:SYAAF) has gotten off to a rough start in 2019, but it could still finish the year with a spectacular flourish.
Before we get into that, let me give you a brief refresher on the company.
Syrah operates the largest and highest-grade graphite mine in the world. It’s called the Balama Mine, and it sits in Mozambique — the southern African nation that is home to about 50% of the planet’s known graphite reserves.
Most of us think of graphite as the hard, gray stuff that’s inside a No. 2 pencil. That’s true. But it’s also the hard, gray stuff that’s inside the batteries that power electric vehicles (EVs), as well as most of the batteries that store energy for power-generation facilities.
Even though graphite hasn’t attracted as much attention as other “battery metals” like nickel, copper, lithium and cobalt, it is just as essential to current battery technologies — perhaps even more essential.
As I explained in my initial recommendation, graphite plays a very unique role in battery technology. 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 in 2018, 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 bad news is that Syrah has so far failed to deliver on this enormous potential. Instead, it has disappointed its shareholders numerous times.
SYAAF Stock Is High Risk, High Reward
When I first wrote to you about Syrah in December, I highlighted its appeal as a play on what I called the “Second Electric Revolution.” I also warned that it was a speculative, one-mine operation that operates in Mozambique.
In other words, this stock offers huge upside but is also susceptible to huge downside. As such, Syrah is a classic “hero or zero” kind of play. And so far this year, its performance has been anything but heroic.
While the stock did rack up some nice gains early in 2019, it surrendered all of those gains and then some when the company announced a disappointing quarterly result on Jan. 29. Since then, this mining stock has continued to tumble down the shaft.
Syrah’s poor recent performance leads us to that all-important question: What’s next?
The short answer is that the company needs to start walking the walk of being a play on the Second Electric Revolution. It needs to begin fulfilling its potential as one of the world’s pre-eminent battery metals miners.
It is, after all, the operator of the world’s largest and highest-grade graphite mine. But so far it has not operated that mine profitably.
The company burned through nearly one quarter of its cash in the fourth quarter of 2018. That’s the kind of thing that makes investors nervous … and for good reason.
But Syrah is forecasting better times ahead. In an interim update dated March 14, the company offered the following tidbits of promising developments:
- Significantly lower negative cash flow than in the previous quarter
- Significant jump in graphite production, compared to the prior year quarter
- The expectation that it will receive higher prices for its graphite production later in 2019.
Previously, Syrah had forecast that it would produce positive cash flow from its operations by the back half of 2019. But words are cheap. The company must deliver on that forecast if it expects to retain the trust and interest of shareholders.
More importantly, it must begin producing positive cash flow in order to begin realizing its potential as a major provider of battery metals.
Syrah has the wind at its back, but it needs to demonstrate that it has the sails that will propel its profitability forward.
Syrah Resources Is Benefiting from Demand
Thanks to the Second Electric Revolution, demand for graphite is ramping up quickly. Syrah estimates that global demand for natural graphite jumped 10% last year. And this trend is just getting underway.
Over the next decade, graphite demand is on track to jump seven-fold.
Very few mining companies are able to feed demand growth of that size. But Syrah could, assuming it overcomes its early growing pains to begin achieving cash-flow positive graphite production.
The company certainly has the potential to reap enormous profits by supplying graphite to the battery makers that will power the Second Electric Revolution. But it must get off the starting blocks by demonstrating that it can produce sustainable and growing profits.
That hasn’t happened yet. If and when it does, this stock could be a 10-bagger … or even a 50-bagger. But if it doesn’t, Syrah will end up as just another stock with unrealized potential.
This stock remains a great speculation, but the company needs to start producing positive cash-flow soon. When it does, I look for this zero to turn into a hero.
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.