Ben Kramer-Miller Still Uncertain About Syrah Resources

Ben Kramer-Miller of miningWEALTH released a report on Syrah Resources Ltd. (ASX:SYR). In it, he reiterate his belief that the company’s Balama project is “economically impractical even if it makes sense from geological and engineering perspectives.”
Essentially, his opinion is that even if it’s possible to develop the project into a large mine (as management believes it can do), that’s not necessarily what the graphite market needs right now.
As quoted in the market news:

The economic reality is that the graphite market is small, and most of the value is realized by those who take their products further downstream. Meanwhile, investors are valuing Balama–and thereby Syrah–as if these economic restrictions didn’t exist. As a result Syrah’s valuation is a magnitude (or two!) larger than the other graphite startups. I think this means there is an opportunity from the short side. Furthermore, I think this opportunity is exacerbated by the fact that the absurdity of the proposed project size–with output roughly equaling global flake graphite demand–reflects poorly on management’s understanding of the sector: this increases the risk of failure.

Kramer-Miller also encourages investors to pay attention to the way Syrah is funding Balama:

More importantly, it is worth noting the way in which the company is financing its Balama Project: 100% equity. This means that financiers looked at Balama and were unconvinced by the project’s high grade, its low capex/opex promises, and its offtake agreements. Furthermore, note the language in Syrah’s PRs and management’s insistence that it is generating “institutional” interest. A precursory glance at the company’s “institutional” owners reveals that it is dominated by index funds. For instance, the Vanguard Total International Stock Market Index Fund (VGTSX) held 924k shares at the end of June. Index funds weight stocks by market capitalization, which means when companies issue stock the index funds are bound to participate in the offering so that they maintain the proper weightings of various stocks in their portfolio. So one must wonder how much of the recently raised money came from active money managers who developed independent bullish assessments of the company. I suspect it isn’t very much.

He concludes:

The bottom line is that while the Balama Project continues to progress as if everything were great Syrah has yet to face its real challenge: selling graphite. With that in mind I am still of the opinion that this progress will fail to result in a successful graphite project precisely because Syrah will fail to sell its production. Consequently, I think investors should continue to look for opportunities to go short, although the ongoing progress creates an illusion of success and could therefore continue to inflate the stock price. Nevertheless as Balama goes into production the reality has to set in that such a large graphite project is untenable, and the share price will have to come down to reflect this reality.

Click here to read the full miningWEALTH report.