Graphite struggles to gain traction

Graphite has not been a star performer in the commodity sector over the past two years but it has just become a little more important for 2.2 million workers who are members of the country’s biggest superannuation fund, AustralianSuper.

In what ranks as one of the more interesting recent investment decisions, AustralianSuper has reinforced its support for Syrah Resources, an under-performing Mozambique-focussed graphite miner, by providing roughly half the funds sought by Syrah in a fresh round of financing.

For a fund which had $140 billion under management at its last balance date, the $55.8 million earmarked for Syrah by way of convertible notes, and $8 million in new shares, is a modest outlay, but one which maintains the fund as Syrah’s biggest shareholder.

The super fund’s heavyweight support for Syrah is also a remarkable vote of confidence in the company’s Balama mine and associated graphite processing assets at a time when the underlying commodity is under pressure, as is Syrah’s share price.

The theory behind AustralianSuper’s endorsement of Syrah is that graphite is one of the key minerals in the development of electric vehicles (EVs) and other battery-storage systems which are best known for the use of lithium and cobalt but actually require more graphite than either of those two headline makers.

A Tesla Model X, for example, uses 120 kilograms of graphite in its batteries while a Porsche Cayenne E-Hybrid uses 16.8kg.

Graphite, however, has not been easy for Syrah, or any other mining company exposed to a commodity which is a pure form of carbon, albeit with special properties in the storage of electricity and in a range of new technologies when reduced to its single-atom status as graphene.

For much of the past few decades, most of the world’s graphite has been produced in China, either in its natural form, or in its synthetic form when extracted from petroleum coke.

Demand in the era before the battery rush was not strong with most graphite used in mundane industrial applications such as the refractories (bricks) used to shape metal products, lubricants, and even the humble “lead” pencil which accounts for about 4 per cent of global graphite use.

Early forecasts of a boom in battery demand for EVs prompted a global rush to find new sources of graphite outside China which had been able to control the supply and price of the material, as it does for a range of minerals and metals.

Syrah was an early, and vigorously-supported graphite player thanks to its first-mover status in Mozambique on Africa’s east coast where vast deposits of graphite have been known for decades but never developed because of local political complications (plus a civil war) and a lack of demand.

For a while, graphite was a headline maker thanks to its status as a leading battery metal and because of intense interest in graphene, the discovery of which earned two British-based scientists a shared Nobel prize.

Unfortunately, the forecast stampede by car makers to secure graphite supplies has not eventuated for several reasons, including ready availability in its synthetic or mined form, and a slower than expected uptake of EVs which is also hurting the lithium and cobalt industries.

Measuring the fall in the graphite price is not easy because it is not traded on an open market and because it is sold in several ways which vary with the quality of the material and the level to which it has been processed.

Syrah’s share price is a handy, albeit depressing proxy for the graphite price because after peaking at an eye-popping $6.27 in mid-2016, the stock has been on a one-way downward slide with last sales at 82c.

On its way up to its share price high, Syrah made a number of optimistic forecasts, including an “assumed weighted average basket price” for its Balama graphite of $US1000 a tonne.

Last week when it revealed the fifth fund-raising in four years Syrah said that “the weighted average graphite price achieved” in the first quarter of this year was $US469/t and the expected weighted average price in the current (June) quarter is $US455/t.

Given that the cash operating cost at Balama is forecast to “trend towards” $US400/t, it's difficult to see Syrah generating substantial profits, though on that score it’s not alone because there is too much graphite chasing a market which has not developed as expected.

Optimists can see a brightening future for graphite thanks to the twin drivers of an accelerating uptake of EVs, and increasing interest from car makers in sourcing raw materials from outside China given trade-war worries.

AustralianSuper is obviously a believer in the long-term future of graphite and Syrah, though there are also a large number of investors who do not share that optimism as shown by the company retaining its status as the most heavily short-sold on the ASX.

According to the latest calculations by the short-sold tracking website www.shortman.com.au, 19.62 per cent of Syrah’s stock is currently sold short, a proportion which looks high but which is actually less than the record 28 per cent short-sold in October 2017, when the stock was trading around $3.50.

The long-term decline in Syrah’s share price will have made the stock a highly profitable play for short sellers and there are obviously plenty of shorters who think the stock has further to fall.

Syrah is not the only graphite-exposed stock on the ASX, but it is the best known and while it struggles to generate the profits forecast when it started developing Balama, it will hang over other graphite stocks and the wider battery metals sector.

Kibaran Resources 

While it's hard to get excited about any graphite stock in an over-supplied market and uncertain EV demand growth, there are a handful of stocks with interesting project plans, including the low-profile Kibaran Resources.

Best known as one of the Australian companies planning to mine graphite in East Africa, Kibaran has also developed close ties with German industry and banks.

The first stage of Kibaran’s Epanko project in Tanzania has a modest $US89 million estimated capital cost and a production target of 60,000 tonnes of flake graphite a year – a fraction of Syrah’s 300,000t a year.

But a second Kibaran project could prove to be just as interesting, a graphite processing facility planned for construction at Kwinana, south of Perth, which is emerging as Australia’s battery-metals centre thanks to a number of nearby lithium projects and BHP’s nickel refinery, which is being re-engineered to produce more battery-grade nickel sulphide.

Lack of investor interest in the broader graphite industry has weighed on Kibaran’s share price which is trading around 13c, the same as it was at the end of last year – which is at least better than Syrah which has fallen over the same time from $1.36 to 82c.