by Peter Ker Rarely can both bulls and bears take heart from the events of a single week in the life of a company, but then again Syrah Resources is a rare type of company.
The world's only seller of natural graphite into China (among other destinations) has been Australia's most shorted stock for much of the past 15 months, and those betting on a sliding share price have now been vindicated twice in the past 11 months.
The $110 million equity raising of October 2017 was followed by a $94 million raising last week, which effectively handed victory to the 21.08 per cent of the register that was sold short the day before the September 4 placement to institutional investors. There was a sense of deja vu for many of the investors receiving last week's pitch, given the "use of proceeds" section of Syrah's presentation listed virtually the same funding priorities as the presentation from the October 2017 raising. Principally, the money would be used to complete the ramp-up of the Balama mine in Mozambique to a positive cashflow position, as well as develop a beneficiation plant in the US.
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For those playing "spot the difference", there was one new addition to the "use of proceeds" section, with $3 million sought for "evaluation of a vanadium resource at Balama"; something most investors saw as little more than a proverbial set of steak knives.
In simple terms, had things gone to plan for Syrah in 2018, last week's raising may never have happened.
Balama was supposed to be cashflow-positive in the first half of 2018, but damage to key pieces of processing kit ensured production volumes, product quality and received prices fell short of expectations this year. Show of faith It may still take until Christmas for the operation to wash its face, and with Syrah's graphite fetching lower than expected prices, management were forced to call on Credit Suisse and UBS to once again help arrange a replenishing of the company's cash reserves.
Morgan Stanley analyst Rahul Anand said he was surprised that Syrah had not sought debt rather than return to shareholders for a sixth time.
"It concerns us that despite the amount of capital already invested in the project, that equity at a discount was the chosen route of financing over debt," he opined in a note this week.
But despite 2018 being a fruitful time for Syrah bears, there was plenty of cause for optimism by the end of the week, with institutional shareholders showing little hesitation in digging deep once again for the company.
The $94 million was raised with apparent ease, despite the fact Syrah has declined to reveal the average price it has been receiving for the small amounts of graphite it has sold, arguing that such information would be misleading.
The show of faith from investors suggests Syrah bulls at big institutions such as Australian Super are determined to stare down the bears.
So is this latest raising the final push Syrah needs to finally jump out of the nest and fly?
A defining six months for the company lies ahead. Hopes for an 'inflection point' By Christmas Syrah expects Balama to be cashflow-positive and to officially be in "commercial production".
Syrah boss Shaun Verner vowed that once commercial production was declared, he would be happy to reveal more information about the miner's received graphite prices.
By the end of March 2019, Syrah expects to be producing purified, battery-grade graphite in the US.
If those goals can be achieved, Syrah is highly unlikely to ever need to raise equity again, with debt more feasible once the mine is cashflow-positive.
UBS analyst Glyn Lawcock said the resolution of issues relating to Syrah's agreements with the Mozambique government may also enable the company to use debt instead of equity.
"The Mining Agreement remains with the Administrative Court for sanctioning and we believe the impediment to putting in place a debt facility," he said in a note.
Morgan Stanley and UBS both expect calendar year 2019 will be Syrah's first year in the black, with the latter predicting a $US43 million profit in that year.
Canaccord's Reg Spencer has shifted back his expectations for Syrah's first profitable year from 2019 to 2020, when he expects a profit of just over $46 million.
"2019 should be the inflection point for the project in our view, on the basis that basket prices increase on product mix improvement, cash costs achieve targeted levels of $US400 to $US450 per tonne and production volumes continue to ramp up," he said in a note.
UBS said Syrah could yet create significant value for shareholders "if management can get it right".
"Syrah has and continues to de-risk the project … We do not see fatal flaws to eventual nameplate production, but full value for the company is unlikely to be realised until it, and positive free cash flow, is achieved," said Mr Lawcock.
SYR Price at posting:
$2.25 Sentiment: Buy Disclosure: Held
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