Ten months ago I told you about the Second Electric Revolution… and the electrification boom that would require large quantities of “battery metals” like lithium, cobalt, copper, and nickel.
It would also require large amounts of graphite, a lesser-known metal that is just as essential (if not more so) for current battery technologies.
That’s why my pick for the Best Stocks for 2019 contest was Syrah Resources, an Australian company that operates the world’s highest-grade graphite mine. 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 pencil. That’s true. But it’s also the hard, gray stuff that’s inside the batteries that power electric vehicles as well as most of the batteries that store energy for power-generation facilities.
Syrah hasn’t had the best year so far. I told you three months ago about its problems with cash-flow — it’s simply not producing any. Unfortunately, its difficulties have gone from bad to worse. Due to a stubbornly low graphite price, this miner continues to pile up losses.
The Losses Keep Coming for Syrah
Through the first half of 2019, the company has posted a net loss of $81 million, compared to a net loss of just $8 million during the first half of 2018. The good news — or less bad news — is that Syrah burned through only $10 million during the first six months. The other $71 million of loss was the result of non-cash asset impairments.
The company still has $60 million of cash in the bank, so it could probably survive another couple of grim years, if need be.
Despite the booming market for electric vehicles worldwide, an “echo boom” in the prices of the so-called battery metals has failed to materialize. The prices of copper, cobalt, lithium, and graphite are all languishing near three-year lows. Nickel is the lone standout among the key battery metals, as its price recently hit a new five-year high.
In response to the dire conditions in the graphite market, Syrah slashed production by two-thirds last month. And there is no guarantee that this deep production cut will be the last, as the price of graphite has slumped about 15% since the start of the year to $400 a tonne.
Syrah’s unit cost of production per tonne is $567. Obviously, that doesn’t work. You could drive a herd of cattle between those two numbers. So unless (and until) the graphite price revives and climbs back to about $567 a tonne, Syrah will be a profitless enterprise.
The graphite price slump stems from typical supply-demand issues. Namely, in response to enthusiasm about rising demand from electric vehicles and other emerging electric technologies, graphite producers around the world have boosted production.
Following that boost, the expected demand surge failed to materialize. Instead, graphite demand unexpectedly dropped, especially from Chinese battery manufacturers.
The Bottom Line for SYAAF Stock
At present, Syrah has just $60 million of cash on hand, which may be enough to see it through another year or two.
But Syrah is definitely flirting with extinction… and it will be very difficult for the company to survive without a meaningful uptick in graphite prices.
I would guess that Syrah will pull out all the stops to buy itself more time. In other words, it probably will not only cut production, but also attempt to do some sort of equity raise, even at its very low share price, in order to acquire enough cash to survive this cycle of low graphite prices.
As I stated three months ago, this company is still “capable of achieving great success… or failure.”
2019 will not be its year — that much is clear. But Syrah will survive this year, and it will also likely survive 2020, even if the graphite price fails to recover. If we do not see a meaningful recovery in graphite prices by this time next year, this company will be in serious trouble. But if graphite prices can recover, Syrah could experience a strong turnaround in the years ahead.
Only time will tell. I’m not counting this company out yet.
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.