Syrah lays down gauntlet to China

It has not come with much fanfare, even though it is one of the most significant developments in the battery materials space in recent times. The China challenge comes from Melbourne's Syrah Resources, which has just produced its first on-spec AAM at its Vidalia operation on the Mississippi in Louisiana in the US, using natural graphite from its Balama mine in Mozambique. It is the start of a major value-adding exercise for Syrah as it involves turning a portion of its Balama production into higher value product by a factor of 10, based on current prices. But it also makes Balama/Vidalia the first vertically-integrated AAM source in the world, outside of China, something the US, Europe and Asia want to see happening across the full suite of battery materials for obvious strategic reasons. Expect Vidalia's newly arrived integrated AAM capability to be of vital interest to battery makers and auto groups looking to secure ex-China supplies of the key battery material, either through offtakes and/or potential strategic partnering. Unlike the cathode side of the batteries behind the electrification of everything in the global war on carbon emissions, the graphite-based anode side has got little attention in recent times. Lithium, nickel, manganese, and other metals used in the cathode side have been the sexy ones to follow as the world frets about supply deficits in response to the surge in electric vehicles sales in the greener world being mandated by leading economies post-COVID. In contrast, the graphite market has been considered over-supplied for the long haul, due mainly to Syrah's development of Balama's market swamping 350,000 tonnes per annum graphite concentrate capacity, the biggest in the world. Balama started production in late 2017 and has yet to produce at full capacity, but even the less than full capacity output was enough to cause a mismatch with supply and demand in the market, prompting Syrah to turn it off in March last year. Syrah's basket price for the Balama concentrates had fallen to as low as US$391/t in the 2019 September quarter - a harsh cash burning reality for a project initially kicked off on expectations of $1000/t prices. But, as has happened in the market for the key cathode materials, the graphite price is on the improve, with Syrah quoting a received basket price for the recent March quarter of $567/t, albeit on small volumes from a recently restarted Balama. The graphite price started to improve at the backend of 2020 and continued to improve in the recent March quarter. There were two reasons for that. When Balama was turned off, just as COVID began its rapid global spread, EV sales were running at 2-2.5 million units annually. In the month of March this year alone, 500,000 units were sold for an annualised rate of six million units. So, EV sales have already more than doubled, with demand for graphite being pulled through as a result. The other key aspect is that Chinese domestic production essentially stopped during the Northern winter. The price has stabilised recently in response to a pick-up in Chinese domestic graphite production, creating a wait and see mood in the market. But the surge in the EV market has prompted record Chinese anode production, and prices are currently supportive of Balama's restart. Whether prices get to the $1000/t price Balama was predicated on remains to be seen. Its 50-year resource base, and its eventual cash costs on full production being achieved of $330/t, mean it will come in to its own - eventually. What is more certain is that there is a big value-add coming from the push in to AAM production at Vidalia where natural graphite, as distinct from the less environmentally-friendly synthetic type, is given a spherical shape to produce an anode precursor which is them coated and heat treated to produce finished AAM. And it is ex-China to boot. The current AAM capacity at Vidalia is small-scale stuff. But first integrated production of the material (Balama's precursor material has previously been toll heat treated to produce AAM for testwork purposes) has prompted Syrah to get moving on its bigger ambitions. Those ambitions were outlined in a bankable feasibility study released last year which looked at a 10,000tpa AAM stage one development with a capital cost of $138 million, moving up to a 40,000tpa operation costing $477 million. All-in operating costs were estimated at $3149t and $2704t respectively (assuming a $400/t FOB Balama graphite concentrate cost). So there's a fat margin to be had on the current AAM price which stands at about $5500/t. And, unlike the first go at Balama with graphite, Syrah would not be swamping the market for AAM, with capacity of the stage one plant estimated to account for 10-15% of projected US demand come 2024. Then there is the added yearn in Europe, Japan, and Korea for ex-China supplies. Syrah is now working towards making a final investment decision on the 10,000tpa plant in the December half, with potential customers/offtake partners now being able to sample Vidalia's integrated product. Success on that front will go to help securing the project's funding package, with a supporting strategic partnership investment by auto and/or battery makers part of Syrah's considerations.

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