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Syrah Resources defends price call amid analyst warnings for graphite hopefuls

SNL Image
Syrah Resources' Balama graphite mine site in Mozambique
Source: Syrah Resources

Syrah Resources Ltd. defended its disputed claim of depressed graphite market prices across all flake sizes, which financial advisory Hartleys said could impact project financing for hopefuls like Battery Minerals Ltd..

ASX-listed juniors have reacted negatively to Syrah's claim of a downturn in natural flake graphite spot prices in China to partly explain its dramatic output cut at its Balama operation in Mozambique.

Tanzania-focused Walkabout Resources Ltd. Executive Director Allan Mulligan said in a Sept. 17 ASX statement that having checked Syrah's claim with his off-take partners and marketing agents in China, he concluded that the "sudden and material decrease" in spot prices for all flake sizes in China has "not occurred as [Syrah] stated."

Based on producers Syrah's and Madagascar-focused Bass Metals Ltd.'s quarterly data, Hartleys' implied spot graphite price for Battery Minerals' Montepuez flake in Mozambique is US$610 per tonne, versus US$1,064 per tonne in the junior's own studies, and US$710 per tonne for Balama flake, versus US$1,106 per tonne in Syrah's previous studies.

This is assuming Battery Minerals can achieve the same flake distribution when in production as its testwork suggests, a feat that neither Syrah nor Bass can currently achieve, Hartleys said in a Sept. 26 note.

"Thus, an element of fine tuning is clearly required with ramping-up graphite flake operations, at the expense of working capital," Hartleys said.

Hartleys Resources Analyst Paul Howard said in an interview that while graphite projects looking for funding anywhere in the world would be watching the China market, other companies looking to sell into the European or Indian market may not be experiencing the same pricing issues.

Flake discrepancies

Though Hartleys said Syrah had largely contributed to the fine flake graphite oversupply, Mulligan said Walkabout's Lindi Jumbo project only contains 25% of the finer product suited to lithium-ion batteries, and which is the most commonly produced natural graphite flake size in China.

"The domestic market in China remains sensitive to over-supply of these products while the market for larger flake sizes remains robust," Mulligan added.

SNL Image
Syrah Resources CEO
Shaun Verner
Source: Syrah Resources

Syrah CEO Shaun Verner told S&P Global Market Intelligence in a Sept. 26 email interview that the company recently saw weaker prices "across the board" for graphite prices, regardless of users' differing specifications.

He said U.S. dollar-denominated fines and coarse flake imports into China have both been impacted by the depreciation in the Chinese yuan against the U.S. dollar.

"Increasing imports of coarse flake from Syrah and an increase in Madagascan exports, especially from privately funded mines, combined with domestic Chinese production has seen weaker coarse flake prices in China," he said.

"Fines prices have weakened primarily on the back the combined impact of seasonal Chinese domestic production and Syrah’s exports to China against short term weakness in battery driven demand."

Citing Shanghai-based market intelligence periodical ICCSINO, Mulligan said the different U.S. dollar spot prices for most categories are still in line with currency depreciation from July 15 to Sept. 12 of around 3%.

In the case of the 100-mesh size generally used for batteries, Mulligan said the price drop is outside the ranges of the currency effects and can be ascribed to short term oversupply in the market.

Meanwhile, the large flake product of 80-mesh has increased in price significantly, despite the negative effects of the currency depreciation.

Price discounts

BlackEarth Minerals NL Managing Director Tom Revy suggested during the Perth, Australia, leg of the Benchmark World Tour that Syrah may have been discounted in going "head to head" with Chinese producers.

Comet Resources Ltd. CEO Philippa Leggat, who was also at the Perth event, said in an interview that, as a general rule, "if you have a product that's expected to meet [a certain customer's] spec and don't meet it you're discounted, regardless of commodity. It doesn't mean the whole industry pricing drops."

Verner said Syrah's product was not below its customers' specifications, as it is "clear on the specification range of our products."

"Individual customers value aspects of our product quality parameters (carbon grade, particle size distribution, impurities) differently, and prices are differentiated across the customer base," he said.

Benchmark Mineral Intelligence Managing Director Simon Moores also said during his firm's World Tour in Perth that Syrah needs to get its costs down to about US$300 per tonne to compete with Chinese miners.

However, Verner said Chinese mines are distributed right through the cost curve, as they form a significant portion of global supply; and as production volumes increase, Syrah’s competitiveness moves further down the cost curve.

Syrah is also addressing structural cost to ensure it has the lowest fixed and variable cost base in place to run safely and consistently.

"Margin is not just about cost, it is also about ensuring that the relative quality value of the product compared with competing products is achieved in pricing," he said.