Originally posted by Essa
Hi Prime1,
The short term risks I refer to are:
1) Ongoing manipulation by hedge funds to lower the share price ... yesterday’s price action seems like a good example.
2) Ongoing delays and issues during production ramp up, resulting in delayed positive cash flow and a requirement for further capital raising.
I’ve got no issues with the first point ... and would probably add to my holdings in that case. I’m more wary on the second point. I have a lot of experience in commissioning of industrial plants and am mindful of the challenges. Equipment issues (failures, high wear rates, instrument accuracy issues etc), difficulties addresing process bottle necks, and unrealistic management expectations are all common in the ramp up phase. With that said, the announcements are starting to provide me with more confidence they will deliver. The 5 weeks of lost production would have provided the commissioning team with a valuable opportunity to address known issues and optimise parts of the process without interference. The last announcement suggests they are starting to reap the benefits of that, and I’m hopeful that continued ramp up to economic rates will be achieved within a reasonable time frame. It’s an educated bet with reasonable odds ... “punt” was probably the wrong word for me to use. I don’t bet on horses.
Thanks, Essa, for those thoughtful comments. I'm afraid the potential for price manipulation will remain, and, though the level of shorting appears to be going down, it remains at a higher level than for most companies.
On the area of ramp-up problems, it was very encouraging to note the big jump in graphite recoveries last month, from around the low 50% figures in the third quarter, to 74% in November. That latter figure is about what is reached by many mature, operating graphite mines. Getting to that level in the first year is something of an achievement, especially as it was accompanied by a grade of 95+% (98% for coarse flake). Those figures, also, compare well with most mature graphite operations. If that November performance is the new norm, and not just a flash-in-the-pan, then positive cash flow in Q1 2019 is likely, which, in turn, should remove the need for any additional CR in the short-to-medium term. ( A hypothetical vanadium plant could need more investment, but that is probably two years off).
The net is that your "educated bet" looks to be sound, and, at current prices, to have good odds. Nice timing!
DoctorFouad suggests that price could be a risk. I'm sure he is right - but, given that Balama will almost certainly be the world's low-cost producer, the real threat in that situation is to the other graphite miners, most of whom have much higher cost structures. And, even though only about 15% of the Balama production is coarse flake, other producers in this area will not be exempt from those same competitive pressures. Coarse flake demand is not a large portion of the market, and, at 300K tonnes per year, Balama will be shipping about 45K tonnes per year. That's not far short of the current world demand, so any small-volume, high-cost large-flake producers are probably nervously looking over their shoulders at the moment.
My guess is that Syrah will try to maintain prices at around the current level, but, until demand catches up with the new supply levels, there may be difficult times ahead for small producers. Funding for new mines, or even expansion of current mines, could be hard to come by.
Cheers
(20min delay)
