Syrah Resources Limited

Ladies and gentlemen, thank you for standing by and welcome to the CIRA Resources Q1 quarterly update call. At this time, all participants are just in the listen-only mode. Following the presentation, we'll have some time for a question and answer session today. To ask a question, you will just need to press star one on your telephone. And just please be advised, today's call is being recorded. But without further ado, I'll hand the conference over to our first speaker for today, Mr. Sean Verner. Thank you, and please go ahead.

Thank you, good afternoon and thanks to everyone for dialling in today. With me on the call is Stephen Wells, our Chief Financial Officer. Today we'll work through selected slides from the presentation deck released along with the report covering Q1 operational focus areas, market conditions and the outlook for natural graphite active anode material and its end use markets. The 2020 demand, supply and operational disruptions due to COVID-19 presented challenges to Syra and to many other companies in the industry. However, Syra's long-term value proposition is fundamentally linked to four things. Firstly, momentum in the electrification of the global transport fleet. Secondly, graphite maintaining its high intensity of use in lithium-ion batteries for EVs. Thirdly, Valama being the world's largest integrated high-quality natural graphite operation. And lastly, our downstream integration strategy to become a large-scale producer of value-added active anode material products. And as the COVID-19-driven impacts have started to clear, these elements of the CSIRO value proposition are brought into sharp focus. Electrification of the transport sector is accelerating quickly with ongoing investment commitment at the auto and battery levels. Increasing customer interest and strong government policy commitments are also evident. Graphite is expected to continue to be used as the primary anode material in lithium-ion batteries and the majority of EV makers are committed to this battery technology with major expansion plans. despite the considerable promotion of potential long-term substitutes which require further technological advances in most cases. We continue to see urgency from policy makers and the private sector to facilitate the transition to EVs and to secure the strategic and critical battery minerals required to achieve this. The profile of graphite as a strategic critical raw material has been confirmed by a number as graphite remains the highest intensity of use material by mass of any cathode or anode material, and the graphite supply chain is presently 100% reliant on China. COVID-19 related supply disruptions and a very strong forward demand profile both demonstrate the significant risks posed by a lack of supply chain diversification to the growing EV market, particularly outside of China. Valama is the best global natural graphite resource on many parameters. With capital invested, our operations, sales and logistics infrastructure is well established and ramping up again strongly, with opportunity for greater efficiency as volumes increase. Valama's product mix is well suited to supply the growing battery market and the Syrah brand is highly regarded across a global customer base, with a reputation for consistency and for carbon grade. This uniquely positions Balaama to supply the wave of demand underway for battery minerals. And while there's much discussion on various long-term options for new graphite supply, the reality in this market remains clear. Balaama is the current and future key to large-scale sustainable supply of natural graphite in the battery supply chain ahead. We're also making strong progress towards becoming the first vertically integrated producer of natural graphite active anode material outside China. We believe our operation in Vidalia is the most viable and progressed alternative for US and European customers for large-scale, localised and ESG-verifiable natural graphite active anode material supply. These attributes are becoming increasingly important strategically and practically for governments, automakers and battery manufacturers. Slide 4 emphasises our deep ESG credentials. Our ongoing supply chain interactions demonstrated rapidly increasing ESG focus and a degree of urgency amongst potential customers. We believe SARA is very well positioned as the sustainability of battery raw material supply comes under increased scrutiny, given firstly the superior environmental credentials of natural versus most synthetic graphite, And secondly, the best practice environmental, social and governance standards embedded at BALAMA, Vidalia and across the CSIRO group broadly, for which we've received significant external recognition. Importantly, BALAMA supply, vertically integrated with active anode material at Vidalia, will provide a source of supply that's 100% ESG verifiable, something that's currently challenging battery manufacturers and auto OEMs outside of China. It is difficult for consumers currently to get comfortable with the social, environmental and governance credentials of much of the Chinese produced material and we believe that Syrah provides a clear solution and a superior ESG proposition in the supply chain. Moving to slide five now to provide an overview on Syrah's first quarter. Pleasingly we reported a quarter end total recordable injury frequency rate of zero at Balaama and this is an outstanding continuation of the downward trend in TRIFA that we've strived so hard for over the past five years and importantly it was achieved through a period of significant operations, maintenance and ramp up work during the quarter. We continue to focus on mitigating the risk of COVID-19 transmission to our workplaces and the communities in which we operate. To date, we've had no cases of COVID-19 reported at Bulama and operational continuity has been maintained. On the market, EV end-user demand growth, the most important leading market indicator for CSIRA, continued to strengthen in Q1. following a good second half in 2020 with forecasts for EV sales in 2021 now approaching 5 million units. At the llama, the easing of COVID-19 operational restrictions and strengthening market conditions demonstrated by increasing engagement with our established customer base led us to announce an intention to restart production We made that announcement in February 2021 and production was recommenced in March ahead of the schedule that we had planned and the ramp up is progressing very well. During March Bulama produced 5,000 tonnes of natural graphite and we shipped 2,000 tonnes of prior sales from inventory during the quarter. Also a 5% interest in the Balama asset was transferred as planned to the Mozambique government in accordance with our mining agreement. At Vidalia we achieved the key milestones of completing installation and commissioning of the carbonisation furnace and transitioning the development project to initial detailed design for the planned 10,000 tonnes per annum expansion of production capacity. We're advancing the key Vidalia workstreams across operations, customer engagement and qualification, project design, funding and product development to position for a final investment decision on the 10,000 tonne AAM facility in the second half of this calendar year, subject to customer commitments and funding progress. I'll now pass over to Steve to talk through some of the corporate elements and our balance sheet position as well as some market highlights. Steve?

Thank you, Sean, and good afternoon, everybody. SARA ended the quarter with a strong cash position of US$78 million, which includes proceeds from the share purchase plan we completed in January. Alongside the institutional placement completed in December 2020, The company also announced at the time a share purchase plan to raise a target of AU$12 million in January 2021. The SPP was heavily oversubscribed, with CSIRA receiving valid applications totalling AU$64 million, and the Board of Directors exercised its discretion under the terms of the SPP to accept AU$18 million in applications. Excluding those SPP proceeds, CSIRA cash outflow for the quarter was US$10 million, It included costs associated with transitioning from temporary suspension into ramp-up at Balama and ongoing investment in operations and project design at Bedalia. We also benefited from a small amount of VAT recoveries during the quarter. The funding initiatives announced in the fourth quarter of last year has positioned the company well to execute our plans for 2021 and beyond, with available liquidity to be used to manage the ramp-up at Balama in an orderly manner. and progress Syrah's natural graphite active anode material facility in Bedalia towards the final investment decision for the 10,000 tonne facility in the second half of 2021. With consideration of the company's strong balance sheet position, greater visibility over near-term VALAMA cash flows as the ramp-up progresses and strengthening market conditions, we made the decision not to issue a AU$28 million convertible note tranche with Australian Super. prior to the 31st of March. We retain the option, however, to issue a final $28 million Australian dollar convertible note tranche with Australian super before the 30th of June. We expect cash outflows in the second quarter to be higher than the first quarter, with additional funding required for both Balaama and Vidalia during the second quarter. At Balaama, we will continue to increase production levels, which generates a greater than normal working capital requirement given the cost of production being incurred in advance of the sales revenue inflows from that production. At the daily we will be transitioning to the detailed design phase of the project. As we transition from Q2 to Q3 however, there will be a more balanced alarm of revenue and cost profile as sales receipts begin to align with production costs. While at the daily we will be completing detailed design and subject to the investment decision process, possibly the construction phase which is as yet unfunded. We remain comfortable with the liquidity profile for the Bulama ramp-up and project-related costs of the Dahlia through to final investment decision for the project, as evidenced by our decision to not issue a tranche of the convertible load at the end of March. Turning now to slide six to talk about the market. Slide six shows our fundamental leading indicator, which is global electric vehicle sales. Positive momentum in EV sales continued through the first quarter. with global EV sales growing 140% year-on-year in the first quarter to over 1.1 million units, compared to less than half a million units in the first quarter of each of the preceding three years, and growth also spread over the major geographies. Turning to slide seven, EV sales, which I referred to earlier, drives demand for graphite active anode material production, and certainly the increase in EV sales I referred to on the previous slide is clearly driving increasing demand for anode material. with Chinese active-owned material production averaging approximately 46,000 tonnes per month for the first quarter and more than double that of the same quarter in the prior year. Upstream raw material demand typically lags both EV demand and AAM production growth. However, we are certainly seeing a tighter natural graphite market balance. Improving contracting conditions are reflected in higher natural graphite prices and sales inquiries from both established customers as well as new opportunities. In addition, strength of demand has been evident on an ex-China basis from steelmaking and industrial markets as buyers seek long-term contract volumes of reliable production and consistent quality. We anticipate positive momentum this year with continued EV model announcements from automakers and significant capacity expansions being executed by battery manufacturers. Of course, further demand momentum will be positive for the continued ramp-up of production towards our initial production targets and then beyond. I'll now pass you back to Sean.

Thanks Steve. Moving on to slide 8 now to provide a more detailed update on Bulama during the first quarter. We recommenced production at Bulama in March ahead of schedule versus the expected lead time of two to three months from the restart decision that we made in February. The company announced its decision to restart the llama production following a temporary suspension of production from March 2020, primarily due to the impact of COVID-19. The restart decision was predicated on the easing of COVID-19 restrictions in Mozambique, strengthening natural graphite market conditions and new inquiries and commitments from our established customer base. These supportive restart conditions were sustained throughout the quarter and into this quarter. We've been very pleased with the restart progress, product quality, both the product mix and grade and plant recovery progressing according to the ramp-up plan. Plant availability is approaching 100% and we've seen no major issues in operation, which is a testament to the preparedness and ongoing plant runs and maintenance work undertaken by the Bulama Ops team during the temporary suspension. The full logistics chain has taken some time to come up to speed but is now well underway and it's worth noting that a major container freight cost and availability challenge for Chinese exporters is providing advantage to Syrah as pressures are less evident in export from Mozambique and there's a need to reposition containers into some of the markets that we're selling into. As I said, Syrah produced 5,000 tonnes of natural graphite at Bulama during the quarter, during a short campaign in March and will continue to run for discrete periods as we ramp up production in line with customer commitments, maximising the efficiency of the operation. Natural graphite shipments from prior sales from product inventory were 2,000 tonnes at a weighted average price of US$567 a tonne during the quarter and dispatch of fresh production is underway this month. SARA continues to see increasing customer enquiry and forward contracting across segments and geographies. Contracts are predominantly to established customers with increasing volumes ex-China, demonstrating demand for Bellarmine's high quality products and for supplier security through the volume potential that we offer. The company is progressively increasing plant utilisation and production volumes as we reinstate the full contingent of labour at Bulama and with consideration of prevailing market demand and those leading indicators. During the quarter we hired 63 additional personnel at Bulama excluding contractors and subsequent to the end of the quarter, we've hired another 97 personnel, taking our labour contingent of Bulama to 380 people, excluding contractors. Importantly, 97% of the new hires are former employees of the company. The company's actively monitoring the security situation in the northern districts of Cabo de Gado province through various government, community and commercial channels. There has been no impact on Syrah's operations, employees, contractors or the movement of people or goods in and out of the llama. The company's security procedures, which are regularly reviewed and updated, are deemed appropriate. As I mentioned earlier, in accordance with the mining agreement, a 5% non-diluting free-carried equity interest in Syrah's in-country subsidiary, TWIG, was transferred to the Mozambique government during the quarter. The transfer reinforces the constructive relationship between SARA and the government of Mozambique and we look forward to continuing government support at national, provincial and local levels. Slide 10 and 11 highlight the progress we are making across multiple work streams at toward our planned expansion to 10,000 tonnes active anode material production capacity. We achieved several milestones during Q1 at Bedalia that strongly advanced our strategy of becoming a large scale supplier of AAM into ex-Asia markets. First we installed and commissioned a furnace to enable fully integrated active anode material to be produced at Bedalia. Until now, we've been producing purified spherical, undertaking the mixing and coating of that material at Vidalia, but using an external provider for the final carbonisation or heat treatment step. Installation of the furnace will see the full process integrated from the llama to active anode material from Vidalia to be dispatched to battery manufacturers and auto OEMs. We're planning to dispatch on specification AAM from the furnace to potential customers this quarter to further advance our product qualification processes. AAM, as I said, has been produced by external carbonisation of Vidalia Anode Precursor for qualifications since the fourth quarter last year and we're extensively engaged with multiple potential customers, both battery manufacturers and auto OEMs on qualification processes and feedback has been positive thus far supporting commercial discussions. Secondly, in conjunction with our engineering contractor we completed the front end engineering and design work and are transitioning to the initial stages of detailed design and some long lead item initial purchasing for the planned 10,000 tonne expansion of production capacity at Vidalia. The feed confirmed the assumptions and identified some improvements from the bankable feasibility study and has validated the robust economics of the project. SARA's preferred construction contractor and contracting model will be selected during Q2. Turning to slide 11, the company is progressing the evaluation of options to facilitate the development of the Dahlia from potential partnership through required customer commitments and of course the appropriate funding mix and sources for construction. Greenhill & Co has been appointed as financial advisor to assist us in this process. Product development also continues to be a focus for Vidalia and we have a number of initiatives underway internally and with external partners to enhance the company's future product roadmap. We're committed to advancing and concluding the various work streams at Vidalia so that we're able to make the final investment decision on constructing the AAM facility sometime in the second half of this year, subject to customer commitments and strategic and financial work progressing. I want to re-emphasise that 10,000 tonnes of production capacity is not the end game for us at Fidelio but rather the next step. BFS assessed options for 10,000 tonnes and 40,000 tonnes of capacity and in time we aim to expand production to 40,000 tonnes and beyond subject to the demand and customer commitments we can get in place. Discussions with potential customers are focused on the development pathway given the very significant demand expectations ahead. Slide 12 through to 17 provides some additional colour on the progress we're making at Vidalia. As shown on slide 12, the milestones during the quarter were installation of the furnace and transition to initial detailed design. On slide 13, we've committed to undertaking detailed design for the planned expansion of the existing plant and infrastructure to 10,000 tonnes capacity, which can be achieved within the existing 25 acre industrial site we have in place. We expect to be ready for a final investment decision for the construction of the facility in the second half, but as I said earlier, the exact timing is subject to customer commitment. We lay out in the milestone chart that a final investment decision to commercial production period is expected to be around two years. Project steps from today onward are largely dependent on that customer engagement and Engineering and design work continues to provide a very strong base to work from and in conjunction with product qualification activities we're well positioned for that strategic and financial cooperation to progress. We're focused on securing high quality partnerships for Vidalia and we'll be ready to progress to FID from the second half subject to this progress. The two year lead time is dependent on that FID starting gun. With rapid demand expansion and clear supply concentration, we continue to push for accelerated support for final investment decision to ensure capacity is available when it's needed by the market. Slide 14 re-outlines the key outcomes of the BFS released during the fourth quarter of 2020 and highlights the financial proposition for CSIRA's planned expansion of the facility. The Vidalia project is commercially attractive and unique in that it has a globally competitive cost structure that leverages our integrated production position as well as our scale and progress to date. The BFS, as we've outlined, considered both the 10 and 40,000 tonne production scenario, demonstrating the economic benefits of scaling production. Again, 10,000 tonnes is not the end game for us here but the first step. As we show on slides 15 to 17, we're well positioned to execute our strategy with a good site which we own and which has all of the required attributes for expansion to large scale AAM production. We've invested in scaling up with commercial scale milling and shaping capacity installed, qualification scale purification in place and now commercial scale furnace commissioned. This work just has not been done elsewhere outside of China and Asia and is therefore a key advantage for CSIRO. We know that this all takes time and that we learn through the process. We've continued to show with BALAMA and Vidalia that whilst lab and pilot work are important, there is a long road behind us for other potential projects in scaling up to the production levels that we are achieving at the moment. Moving on to slide 18 and 19, Tier 1 battery manufacturers in the US like Tesla, LG and SK Innovation have announced significant new battery projects in country with LG and SK focused on service to key legacy automakers through the EV transition. This rollout must accelerate to meet OEM EV commitments and plans and consumer demand. It's forecast that the US battery manufacturing capacity will triple to 145 gigawatt hours by 2024 and potentially reach 375 gigawatt hours by 2030. The Vidalia facility will provide a commercial scale co-located and long-term AAM supply option for this battery capacity as well as potentially for export into European markets. 10,000 tonnes AAM capacity at Vidalia equates to roughly 10% to 15% of the total natural graphite AAM required to support forecast 2024 North American battery manufacturing capacity. and therefore it provides plenty of opportunity for further growth in the market as production capacity expands and allows us to benefit from the extensive VALAMA supply availability that would support an expansion of the data. So finally on to slide 20, the company has really turned a corner in Q1. with the upstream natural graphite market conditions improving and Balaama production recommenced ahead of schedule. This in conjunction with our robust cash position and the various work streams being advanced at Bedalia positioned the company well to become a sustainable supplier of quality graphite and AAM products, enabled and differentiated by vertical integration with the Tier 1 natural graphite operation of Balaama. Our planned milestones during the second quarter are to complete the reinstatement of the full labour, logistics and contractor capability for ramp-up at Bulama, to increase plant utilisation and production at Bulama in line with market demand, with a focus towards 15,000 tonnes per month later this year. Production of fully integrated on specification active anode material is targeted from Bedelia during the quarter to be dispatched to potential customers to further advance product qualification processes. We're also working to accelerate the evaluation of strategic and financial options at Bedelia in conjunction with those product interactions. We're seeking to advance detailed design at Vidalia for the 10,000 tonne expansion, production capacity and readiness for a final investment decision and make a selection of our preferred construction contractor and contracting model at Vidalia. So we see significant momentum for the company and catalysts ahead and we're pleased to be progressing strongly into 2021. And with that, I will move across to any questions.

So, ladies and gentlemen, we'll now begin that Q&A session. Once again, if you'd like to ask a question, you can just press star 1 on your telephone keypad and then just wait for your name to be announced. And if at any time you need to cancel your request, it's just by pressing the pound or the hash key. Thank you. Once again, Star 1 to ask a question. But we do have a first question. I'll first go to Mark from Foster Stockbroking. So please ask your question, Mark.

Yes. Hi, Sean. Good quarter. Yeah, just a question on the ramp-up at Bellarmine. You're obviously mentioning there in your summary looking to ramp up towards that 15,000 tonnes per month. I was just wondering... Can you give us a bit more of a sort of a more definitive sort of time when you might reach that? Are you thinking maybe mid this calendar year or next month? I was just wondering if you can give some colour on that.

Yeah, thanks Mark. Look, we've been quite clear previously that announcing or forecasting our production for plans is something that is not in our commercial benefit during negotiation periods and as we've moved into a pretty intense period of contracting, forward contracting through Q1 and into Q2 will maintain that position. I think previously we have made it fairly clear that being at 15,000 tonnes minimum production per month is where we seek to be for the cost base. to be more sensible and certainly we're seeking to get there relatively quickly but without inducing any oversupply in the market.

Right, okay. But I gather the way that you... I guess you mentioned that the plant availability is getting close to 100%, so you're pretty happy with the way the ramp-up is going operationally?

Absolutely, there's no significant challenges at all from the operational perspective. We're really just being careful with ensuring that we manage our impact on the market balance. As we've said previously as well, we were quite careful around waiting for strong market indicators, leading indicators before making that restart decision so hopefully that provides some context, particularly through very strong EV sales, record active anode material production, strong year-on-year steel growth continuing in the industrial markets, that the demand profile ahead is supportive of us reaching that 15,000 tonne targeted production level relatively quickly.

Okay, great. Thanks, Sean.

Once again, just star 1 to ask a question or comment. Thank you. Okay, we have another question on the line. I'll next go to Andrew Harrington from Petro Capital. So please ask your question, Andrew.

Good afternoon, gents. Thank you for your presentation. Can you give us a bit of colour on the logistics chain from Palama to Louisiana, the ports, costs, etc.? ?

Yeah, we've previously outlined the cost structure and the capacities of the logistics chain. The trucking and warehousing to dispatch from Bulama to Nicala is actually the highest cost component, single cost component of the C1 cost for the Bulama operation. At NACALA we have a significant warehousing and container packing and dispatch operation operated by our dedicated logistics contractor. We sea freight via container shipping using standard shipping lines around the world from there and sell predominantly on a SIF basis. We've provided information previously around our sea freight costs averaging somewhere between $30 and $40 a tonne, depending on the mix of geographic locations. It's worth noting at the moment that there is enormous disruption in the container freight market globally, particularly impacting people trying to export out of Asia to Europe, the US and other locations. We're actually benefiting from that disruption at the moment because are seeking to reposition empty containers into Asia and as a result we continue to see good competitive freight rates out of Africa into Asia. We can follow up later on with the historical breakdowns on some of the logistics costs in country in Mozambique.

And from Mozambique to the Gulf, Mexico?

Yeah, what about it? The availability or cost?

Oh, so yeah, so $30 to $40 from Africa to Asia, but what about Africa to America?

The $30 to $40 is the average across destinations. Africa to the US is in the higher freight costs contributing to that average and at the moment it's not a significant proportion of the total global volume being shipped because obviously consumption through Vidalia at the moment is only part of the qualification process.

Okay, thank you very much.

Thanks.

And perhaps just one final reminder, if you'd like to ask a question, you can just press star one. Okay, it appears we have no further questions at this stage, so I might hand back to you for now, Sean. Oh no, sorry, sorry, sorry. We do have one last minute question. I'll next go to Daniel Fu, a private investor. Please ask your question, Daniel.

Hi, Sean. Can you talk about contingency plans in terms of supply? when Vidala is up and running, given especially in terms of what happened in Mozambique recently?

Thanks for the question Daniel. So obviously, as I said earlier, the lead time on a final investment decision to production for Vidalia is around two years. So at this point the focus is on the integrated BALAMA and BALAMA2 Vidalia supply chain. It's important to note that at 10,000 tonnes active anode material capacity the operation would consume around 18,000 tonnes of BALAMA fine graphite. Historically we've reached that sort of production level in a month and that would be well under 60% capacity utilisation. We don't see a significant need for contingency planning. What I would say however is that we have retained right through the development and operational period very good links to existing operations and also other potential projects and we keep a very close eye on both potential commercial and operational cooperation that may be useful to us in the future. So we don't have any significant concern at this point around supply into Vidalia.

Thank you. Okay, with that, there are no further questions, so I'll hand back to you for now, Sean. Sorry, once again. Sorry, we have one more question. I'll next go to Andrew Harrington from Petro Capital. Sorry, Andrew, go ahead.

Thanks for letting me get in there last minute. Can you talk through some of the remaining approval or that kind of regulatory requirements that are still necessary for Vidalia?

Yes, sure, Andrew. I mean, we'll talk just at a general level at the moment. Obviously, in selection of the site, we've had a forward eye on the required approvals. At the moment, environmental permitting etc. is obviously in place for the existing operation and the permitting requirements around that will be for expansion of capacity and volumes. whether that be air or other emissions approvals, but obviously the design of facility and the way that the project is being put together is very much focused on those approvals. So we do not see a significant impediment on that front and there's no other major approval areas other than the standard environmental approval processes that we need to go through.

So the existing facility there allows you to to use their approvals for whatever the purposes and processes.

So the existing facility is appropriately permitted to its production levels? As those planned capacity expansions come through, there's additional permitting requirements around the volumes that come from that capacity expansion, but the same permitting process that we've already been through.

And regardless of the composition of the waste or emissions or things like that?

Well, the process that we are putting in place for the commercial facility is the same as the process that we have in place for current qualification production that we are undertaking at the day. So there's no major change in composition of the emissions through the expansion process.

Okay. Thank you very much.

Thanks.

Okay, with that, there's no further questions, so I'll hand back to you for now, Sean.

Thanks very much. We appreciate the participation and attention today and look forward to continuing to keep everyone updated on progress through what should be an exciting second quarter. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. Once again, thank you all for participating today, but you may now disconnect.