Syrah Resources faces capital raising risk as bearish graphite markets bite

Graphite is supposed to be a critical battery metal that’s leveraged to the growing demand from megatrends like EVs and decarbonisation. But that’s hardly the case on the equity market front – with shares in Syrah Resources (ASX: SYR) collapsing 16% on Tuesday after another disappointing quarterly update.

The stock was already down 56% year-to-date and the latest selloff has tipped its performance a fall of 63% this year.

Syrah 12-month price chart (Source: Market Index)

From bad to worse

Syrah moderated its production in April with the view that it’ll pick up output once  “demand conditions and sales orders at economic prices warrant higher capacity utilisation.” But graphite markets continued to deteriorate in the June quarter.

“Domestic natural graphite production in China increased seasonally in the June 2023 quarter, resulting in reported natural graphite prices in China falling by ~20% since the beginning of 2023,” the company said in a statement.

Balama production came to a halt in May and June as the company maxed out its inventory against a backdrop of weak customer demand. We’ll highlight some of the key financial takeaways below:

• Costs of US$565 a tonne in April

• Sales price of US$677 a tonne in the quarter

• Sales of US$9.58 million (from US$35.2 million in the prior quarter)

• Operating cash outflow of US$29.5 million

• Cash and cash equivalents of US$100.6 million (from US$84.2 million in the prior quarter)

• Rise in cash reflects US$77.55 million in borrowings and convertible debt securities

“Net cash flows from operating activities for the quarter was weighed down by the Balama production pause in May and June 2023 and relatively high working capital,” the company said.

Funding risks

Syrah is seeking to become the first major integrated ex-China producer of natural graphite active anode material for EV batteries via the development of its Vidalia facility in Louisiana. 

The Project faces a US$100 million funding gap as Syrah seeks to cover that shortfall via a higher US Depart of Energy loan and possible equity partnerships, according to Macquarie.

“We assume [the shortfall] is funded via an equity raising in the first quarter of 2024 at 70 cents per share,” the analysts said in a note.

If Macquarie is referring to the full US$100 million – This would imply an almost A$150 million raise, which equates to approximately 29% of the company’s current market cap. 

“Syrah reported a weak quarter, with Balama production paused due to weak market conditions and the 11.25ktpa Vidalia expansion being delayed a quarter,” said Macquarie.

“Our EPS loss in CY23e widens by 275%, while EPS for CY24e falls 71%. EPS for CY25e onwards decreases by 25-35% … the earnings downgrade and changing our equity raising assumptions have driven a 35% decrease to our price target to $1.30.”

Capital raising overhang

The situation draws similar comparisons to 29Metals’ (ASX: 29M) Capricorn Copper mine in Queensland. The project was hit by unprecedented flooding, which forced the company to suspend operations on 9 March. Capricorn isn’t expected to come online until the September quarter 2023 via a two-staged approach.

Similarly, Macquarie expects the company to raise $50 million at 80 cents per share in the December quarter to “help bolster the balance sheet.”

The question is – Does this kind of overhang weigh on the likelihood of a bounce for both stocks as investors know a sizeable discount/dilution is just around the corner?