Syrah Resources Limited

Good day and thank you for standing by and welcome to the CIRA Resources Q1 quarterly update. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. For any further assistance, it is star 0. And I'd like to hand the conference over to you for a speaker's say to Mr. Sean Verner. Thank you. Please go ahead.

Good morning and thanks to everyone for dialling in today. With me on the call is Stephen Wells, our Chief Financial Officer, and Viren Heera, our General Manager of Business Development and Investor Relations. Today, CSIRO released its March 2022 quarterly results, covering operations, market conditions, the Vidalia initial expansion projects, and the outlook for natural graphite, active anode material, and their end-use markets. And we'll use the slide deck released today for this discussion. In 2022 year to date, SARA has announced the achievement of pivotal milestones for the company and is strongly advancing toward its objectives of becoming a large-scale, vertically integrated natural graphite active anode material supplier. The favourable upstream market setting for natural graphite is also translating to high demand for the LAMA products. Market conditions in the upstream market have strengthened from last year and are the strongest they've been since Bulama's commencement in 2017, with very good momentum in battery-driven demand growth, seasonal inventory lows and supply interruptions, all culminating in strong physical demand and rising prices for natural graphite. This is despite the expected seasonal restart of Chinese natural graphite production through the second quarter. High growth rates in the electric vehicle market continue to be reported with EV sales at around 2 million units in the first quarter, up almost 80% on an already high base in Q1 last year, and strong demand growth across major global consumer regions. We're now seeing the same levels of EV sales in a quarter that we were experiencing for a full year only two to three years ago. Total Chinese active anode material production increased to over 90,000 tonnes in March 2022, which was a record monthly level and up over 80% year-on-year as well. The global and regional battery manufacturing capacity pipeline and resulting active anode material growth requirements are significant. and announcements for additional battery manufacturing facilities by incumbents and new entrants provide a great setting for Vidalia's initial and subsequent planned expansions, as well as Valama and its strategic position in the battery supply chain. All around the world, governments and markets recognise the key role of critical minerals such as graphite in facilitating transport electrification and energy storage development towards the objective of reducing global carbon emissions. This is clearly evidenced in the USA, with the Biden administration recently invoking the Defense Production Act to support production and processing of critical minerals, such as graphite, for large capacity battery manufacturing in the US, and broader recognition of the importance of graphite, which has not received as much focus as other battery minerals until now. Positive ESG differentiation also continues to increase in importance as greater understanding and visibility by end manufacturers and consumers highlight challenges in parts of the existing battery materials supply chain. Each quarter we reiterate our belief in the importance of the BALAMA asset and our vertically integrated anode material facility at Vidalia to the future of this transition. The actions being taken by customers, investors and governments, and commercial arrangements being entered into with Syrah validate this view. Continued disruption in the global container shipping industry again constrained Palama production and sales during the quarter. However, in developing and executing on a major logistics option from Pemba, we've mitigated the impacts and increased sales. We still have work to do on this front, but we're very optimistic about Galama's future volumes from here. Slide four of the deck reiterates our fundamental ESG commitments and performance focus, and every quarter that passes highlights the criticality of this effort. Since the company's commencement, ESG excellence has been a key focus, and we're beginning to see the very real impact of downstream customer requirements and supply chain auditing bring differentiation between incumbent production of anode material and ourselves into sharp relief. We recently announced a final investment decision to construct a solar and battery system at Bulama. This system is expected to yield a material reduction in carbon emissions and cost benefits by replacing a significant proportion of diesel generation and consumption presently used for Bulama's power needs. Minviro recently updated the independent lifecycle assessment of SARA's integrated operations from Bulama Origin to Vidalia Anode Material Customer Gate in accordance with ISO standards, leading to a material reduction in the estimated global warming potential of SARA's integrated operations versus last year's estimate. Again, it's estimated that SARA's operations exhibit materially lower global warming potential compared with representative natural graphite and synthetic graphite anode material suppliers benchmarked in China. Specifically on other ESG outcomes for the quarter, our health, safety and environment performance remains outstanding. The total recordable injury frequency rate at Bulama was 0.9 in the March quarter, and the Bulama TRIFA has remained below one since late 2018. Now, TRIFA at Vidalia was again zero in the March quarter. We'll now move to some key aspects of the quarterly summary, and I'll hand over to Steve here to make some comments on the corporate position at the bottom of slide five before making some remarks on the market. Steve?

Thank you, Sean, and good morning, everyone. On the corporate front, Syrah finished the quarter with a cash balance of $205 million. compared to 53 million US dollars at the end of 2021, which includes net proceeds from the equity raising of $176 million that was completed during the quarter. Our cash position fully funds the Bedalia initial expansion to start production and has provided SARA with the funding to immediately proceed with investment in further detailed engineering and procurement and construction activities. We also have sufficient liquidity to fund working capital and capital costs across our group. Excluding net equity raise proceeds, total cash outflows for SARA are $24 million, with the daily cash outflows across operations, expansion and technology development of approximately $14 million, and the remainder relating to VALAMA and corporate costs. In terms of VALAMA, We were able to produce at our minimum production target of 15,000 tonnes per month, or 46,000 tonnes for the quarter. With the addition of our first break-bulk vessel during the quarter, while lower than production, Balama sales of 35,000 tonnes were materially higher than Q4 last year. However, we want to continue to grow sales volumes and production, which are only constrained by container shipping at this point in time. From a working capital perspective, higher production than sales represents a draw on working capital. However, this will even out the sales match production and was also somewhat offset by attractive payment terms on our first break bulk shipment. Similarly, there also continues to be a lag between higher shipping costs being incurred at present and increased pricing on tons being shipped, compared to what we are experiencing on new orders. This will also balance out over time, and there is good pricing growth through the order book, which will compensate for the shipping price increases we have seen. Over the short to medium term, we expect shipping costs to moderate with a normalisation in the shipping market, while current price support for natural graphite based on market factors is strong. We do note, however, that there is material uncertainty relating to the duration and extent of impact from the current China lockdowns. In the current market, we are likely to continue the prepayment of natural graphite sands through break malt shipments, which will also improve working capital. And we also note the weighted average price for the quarter exhibited strong upward momentum and was well in excess of our C1 costs and our minimum time production volume. As highlighted through the equity raising process, SARA is progressing debt funding processes with the USDOE and DFC on funding requirements for Vidalia and Valama, respectively. As a result of those initiatives and the Vidalia offtake process, forefront costs were higher than normal during the quarter. Clearly, we see significant benefits to the company from these funding processes, and as shown with the achievement of the conditional commitment from the DOE in April, we continue to make good progress. Moving to slide six and current market conditions, as Sean noted, the end market sending in 2022 year-to-date has been outstanding with strong momentum in EV production and sales globally. And with broad-based electrification of model ranges planned by major automakers this decade, this trend is likely to continue. To underpin this substantial mobility transition, further large commitments are being made to develop EV and battery manufacturing capacity across the globe, including in North America. Slide six shows our primary leading indicator, global electric vehicle sales. Positive momentum continued in EV sales and penetration in Q1 2022. Global EV sales grew 80% versus Q1 2021, to approximately 2 million units, with strong demand growth in China, Europe and the US. Year-to-date EV sales growth has been from a high basis in 2021. Most forecasters project further increases in EV sales across major geographies through this year. supported by shifting consumer attitudes and more EV models driving adoption, the build-out of charging infrastructure networks and supportive government policy. It is worth noting, in the context of 2 million EV sales in Q1, that this exceeds the full year of sales of EVs as recently as 2019. EV sales and battery demand growth are feeding up to demand for ammo material, as demonstrated by total Chinese AAM production increasing to another monthly production record of over 90,000 tons in March 2022. The trend on this front has been very strong over the past 18 months, and our interaction with variable graphite producers in China demonstrates robust forward demand. Demand growth is coinciding with supply headwinds, with natural graphite production in China being impacted by production and restocking challenges prior to, during, and after the seasonal winter outage. and this has significantly reduced feedstock preventory in the Chinese and over-supply chain. Cyrus 4 and sales orders, which already exceed 90,000 tonnes through to the end of the year, up from 80,000 in December, and despite 35,000 tonnes in sales this quarter, suggest that customers have strong demand requirements and remain concerned about future Chinese natural grab-bite production availability and the market balance. Turning to slide 7 and 8, These provide the updated picture of the global and regional battery manufacturing capacity pipeline forecasts and announcements, as well as the resulting graphite battery and material forecast requirements. The growth ahead for the industry continues to strengthen, providing a very strong backdrop for the company to increase production capacity utilisation of the llama and a great setting for Bedalia's initial expansion and potential subsequent expansion of Bedalia. and investigation of a possible European AAM production phase in the future. I'll now hand you back to Sean.

Thanks, Steve. On slide 10 through to 14, we move to Galama production, sales and logistics performance in the first quarter. The two key takeaways from Belama's operational performance during the quarter are, firstly, that production achieved a minimum target rate of 15,000 tonnes per month over the quarter for the first time since the September 2019 quarter, with a total of 46,000 tonnes produced in total. And secondly, the C1 costs were within our US $430 to $470 a tonne guidance at the 15,000 tonnes per month production rate. The development and execution of Pemba break bulk shipments to supplement Nakala container shipments enabled significantly higher production and sales levels at Balaama this quarter compared to previous quarters. However, quarterly production remained constrained by maximum inventory positions at Balaama, Nakala and Pemba. and ongoing disruption in the global container shipping market. At the Lama, the 46,000 tonnes of natural graphite was produced at 76% recovery and 35,000 tonnes was sold and shipped during the quarter. All 30,000 tonnes of finished product inventory at the conclusion of the quarter was contracted to customers and the Ford sales book continues to grow. Product quality was consistent with previous quarters with stable grade above 95% fixed carbon. Plant recovery of 76% was lower than the recovery achieved in campaign operations during Q4 2021. And this was due to three things. Higher process variability driven by a lack of space for finished products. Secondly, planned maintenance activities. And thirdly, integrating a new cyclone system in the secondary milling circuit which is already delivering significant operational benefits. While lower than previous quarters for the reasons highlighted, plant recovery was materially higher than when Belama last operated at an equivalent throughput rate in 2019. As I said, SARA completed a major process improvement project at Belama with the commissioning of the cyclone system to increase liberation and optimised classification efficiency from the secondary milling circuit. The cyclone system forms part of the LARMA's recovery improvement plan and is expected to yield a step change in recovery capability of the plant. This has been demonstrated since commissioning of the cyclone system in March and after the quarter end. Our C1 cash costs, FOB NACALA of US $464 a tonne for the quarter, reflect the benefit of fixed costs being spread over an increased production rate and were within C1 cash cost guidance of $430 to $470 a tonne at 15,000 tonnes per month production. The LAMA unit costs are expected to reduce further as the production rate increases beyond 15,000 tonnes per month. with improved shipping options and availability, and as recovery improvement initiatives continue to be embedded. SARA took a final investment decision on a hybrid solar and battery system at Valama, which will be delivered under a build, own, operate and transfer or boot arrangement, and is expected to reduce Valama's carbon emissions and operating costs and generate attractive returns for the company. We're also currently working through the renewal of our Balama Mining Services contract to further improve our total cost and performance position. Moving to slide 13, which contains further detail on the Balama sales and marketing side. As I mentioned, we sold and shipped 35,000 tonnes of natural graphite during the quarter, including 19,000 tonnes in the March month. incorporating our first spot breakbox shipment from Pemba. While significantly higher sales were achieved this quarter versus last quarter, unprecedented container shipping market disruption continues to impact the company's ability to secure desired container capacity for the LAMA shipments from Nicala and to match product shipments to very strong underlying customer demand. Breakbox shipments from Pemba will continue to be utilised to supplement container shipments to increase volumes, and two further break-bulk shipments have already been scheduled for the second quarter. We're seeing very strong demand in forward contracting with customers, with more than 90,000 tonnes of sales orders for the June 22 quarter and into the second half of 2022 already booked. The weighted average sales price increased to US$573 a tonne SIF during the quarter and US$590 a tonne SIF in the month of March 2022, reflecting the strong market conditions. New contracts in the quarter were at prices materially higher than the average basket price and further price support has been evident after quarter end. Fines sales accounted for approximately 79% of overall product sales during the quarter, and the fines market is consistently exhibiting relatively stronger price growth momentum than the course market, reflecting the different underlying market drivers for each segment, including the record Chinese anode material production, coinciding with Chinese fines supply disruptions. Several major natural graphite processing facilities in China have been negatively impacted by environmental challenges prior to the seasonal winter outage and ongoing COVID-19 related interruptions. With the challenges in the shipping market hindering imports into China, Chinese inventory positions have been rapidly drawn down over winter. Record monthly Chinese anode production rates in conjunction with the supply disruptions and driving very supportive pricing dynamics for the company. Third-party price reporting agencies are publishing significant increases in China domestic natural graphite pines prices, with reported prices approaching US $800 a tonne. It's important to note that Syrah's weighted average price achieved may not reflect this spot price, as it includes prices to sales under a mixed spot and term contracts, and differing pricing and delivery mechanisms. However, as I noted, we're seeing contracted prices increasing strongly for new contracts and spot shipments. Horse flake prices ex-China remain strong through the quarter, with prices increasing due to strong industrial demand and ongoing supply disruption, including from the Ukraine and Russia. Significant sea freight rate volatility and surcharges are evident, caused by international logistics disruptions, fuel costs, COVID-19 restrictions, and global trade imbalances. SARA's current average shipping unit cost is approximately three to four times the long-term average. And whilst product pricing has improved, it's yet to fully offset the increases in sea freight rates for the company. We're taking action through the development of the alternative logistics option in break-box shipments through Pembroke Port. Great bulk shipments from Pemba create an additional export route for Balama products, provide flexibility in managing inventory positions, and will enable significantly higher product sales than could otherwise be achieved solely through Nicala port, given the prevailing container availability constraints. Moving on now to progress at Vidalia on slides 15 and 16. SARA took pivotal steps in its strategy at Vidalia to become a vertically integrated natural graphite anode material supply alternative for US and European battery supply chain participants during the March 2022 quarter and post-quarter end. We were very pleased to announce a final investment decision to expand Vidalia's production capacity to 11.25 thousand tonnes of active anode material per annum during the quarter. The company has invested significant time, effort and capital in de-risking its entry into the downstream anode material market, including construction and operation of the existing commercial scale qualification facility in Vidalia, technical product development, product qualification with target customers and various phases of studies and engineering on the Vidalia initial expansion. The final investment decision establishes SARA as a first mover in the integrated downstream anode market outside of China and is the first step in our objective of delivering fully qualified products into what is a rapidly growing market. Syrah has created a differentiated position at Vidalia that is not easily replicated. The company has also assembled a high-caliber team for management of the expansion project as well as continued operations of the qualification facility. During the quarter, SIRA awarded Worley a contract to provide construction management services for the Vardalia initial expansion project through an integrated Worley and SIRA construction management team. Detailed engineering on the expansion project was more than 60% complete at the end of the quarter with Worley, and construction is progressing within the planned schedule and budget. After FRD we reassessed the baseline for the project with further construction contracts being executed, purchase orders advancing and early stage site works well underway. The company completed all planned early works for site preparation including earthworks, road preparation, temporary power connection and construction of temporary facilities during the quarter. Construction of the 11.25,000 tonne anode material facility is expected to be completed in the second quarter of 2023. And following commissioning, start of production is targeted in the third quarter of 2023, with an 18 month ramp up period to the full estimated production rate. Capital costs associated with the Bardalia initial expansion project are being fully funded from CSIRO's cash reserves. We're also making good progress with the US Department of Energy for debt funding. We've recently finalised a non-binding term sheet and announced a conditional commitment for up to US$107 million in loan from the DOE to fund the project following an extensive period of due diligence, part of which is still ongoing. The proposed loan is to be made under the DOE's Advanced Technology Vehicles Manufacturing Program in support of the Biden administration's critical mineral strategy. If finalised, the loan to SARA would be the first from the ATVM loan program since 2011, and the first ever from this program to a materials processing facility, highlighting Vidalia's strategic position in the USA and providing strong validation of the project. We're focused on completing negotiations and finalising the loan, such that advances are well aligned with the capital spending program. The loan will be highly attractive to the company and would allow CSIRO to deploy surplus cash to valuable growth initiatives including further expansion of Vidalia to support expected market growth based on strong forward demand indications exhibited through current commercial and technical interactions. We were very pleased as well to announce our uptake agreement with Tesla in December 2021. This agreement was a key catalyst for the Vidalia final investment decision and also contains an option for additional volume with a further expansion of Vidalia. Syrah is engaged with multiple additional potential customers on qualification and introduced testing programs progressing well. Ongoing commercial and technical interactions demonstrate strong interest for the uncommitted volumes from the 11.25,000 tonne facility and further volumes from any planned expansions. Our target customers are incumbent electric vehicle OEMs and battery cell manufacturers with operations and new developments primarily in the USA and Europe. Market growth and segmentation, particularly around localisation and ESG, is expected to benefit CIRA in its commercial engagements with these potential customers. The company's objective is to enter into further commercial agreements for the uncommitted volumes before the start of production in Q3 2023 and to use that process to extend support for future expansion of the data. Syrah has significant future opportunity with its combined position at Vidalia and the globally significant graphite resource and operation of Valama. The Tesla option for additional volume, broader customer interest and market evolution have motivated us to assess a potentially accelerated, larger expansion at Vidalia. and will complete this year a detailed BFS to move Vidalia to a production capacity of 45,000 tonnes of anode material per annum. Progression of Vidalia's expansion beyond the initial 11.25 thousand tonnes of anode material through detailed engineering, procurement and the construction phases would follow the BFS sequentially, subject to SARA board approval and customer and financing commitments. North American battery manufacturing capacity is forecast to increase to approximately 400 gigawatt hours by 2026, requiring almost 400,000 tonnes per annum of active anode material. The 45,000 tonne active anode material facility would represent only 11% of anode material required for the North American market at that time. Scaling up of SARA's downstream business is underpinned by the LAMA and its results, and the opportunity to consume a significant amount of current design capacity internally over time and to expand the LAMA to supply third-party customers are important factors in the overall upstream supply-demand balance. Even at an expanded 45,000 tonne facility at Bedelia, only approximately 25% of Balaama's production capacity would be utilised internally. So to conclude on slide 22, SARA is very positive about the period ahead. EV sales growth, a constructive demand environment for anode material and Chinese supply disruption driving strong demand and pricing for Balaama products. Increased shipping optionality, relief of inventory constraints and strong demand should facilitate increasing valama production beyond 15,000 tonnes per month and enable higher sales volumes. Construction of Vidalia's initial expansion is progressing within schedule and budget and DOE and DFC loan processes are advancing. highlighting the strategic importance of CSIRA's integrated operations to electric vehicle and battery supply chains and governments, potentially freeing up liquidity to invest in further growth opportunities. The current market and CSIRA's progress demonstrate the unique position we occupy with the largest global integrated natural graphite operation at Palama, and the most advanced option for vertically integrated supply of natural graphite anode material outside the Asian markets. We look forward to keeping you all up to date on the company's progress, and with that, we'll move across to Q&A.

Thank you. We'll now begin the question and answer session. If you wish to ask a question, please press star 1 in your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound-hash key. Please note there might be a slight pause as questions queue. Once again, it is Star 1 and we're for your name to be announced. Thank you. Once again, it is Star 1 to ask the question. But our first question in the queue is from Mark Fichera from Foster Stockbroking. Mark, please ask your question.

Yes, congratulations, Sean, on a great improvement in the quarter. A couple of questions. Firstly, you mentioned the freight costs being about three times the long-term average. I think in the last quarter you mentioned it was around $100 a tonne on that freight. I was wondering if you could quantify maybe what the freight costs were in the March quarter and how that's sort of panning out for maybe the next quarter.

Thanks, Matt. Yeah, the long-term average freight cost out of the llama is somewhere between $40 and $50 a tonne. So, as I said, we're seeing freight costs at the moment between three and four times that. As for where that's going, I think the major factor in impacting potential future freight rates is what happens with the current China lockdowns. There is obviously significant delays and disruption in both loading and unloading container vessels and bulk vessels around Shanghai at this point in time. And that will feed through to challenges in schedules for container lines. And that has been a key factor in seeing increasing rates over the past 12 months. It is interesting, however, to note that there has been a moderation in the overall average freight rate for containers globally that has come down from its peak over the last month or so. So there is some sign of potential improvement, but that could be further impacted by ongoing disruption in China.

Okay, thanks. And just one more thing. from me just on the recoveries you mentioned obviously the issues that affected that but obviously you've put in this cyclone system and looking for an improvement there can you quantify you know what you expect for the long term recovery now I guess you did I think you did 82% in the previous two quarters are you looking to go beyond that with this modification to the plant

Yeah, the long-term target is above 87% and hopefully to somewhere around 90%. The implementation of the cyclones is one step in the recovery and improvement program that we've had in place for a couple of years now. And now that we're back to a more consistent operating rhythm, it really gives us a chance to embed a number of those improvement actions. We expect some good improvement from the implementation of the cyclones in the secondary milling circuit, but the program as a whole, which is both process and change-based, will see us continue to improve that recovery level to the high 80s and hopefully into the 90% range. Okay, thanks.

And once again, if you do wish to ask a question, it is star one on your telephone and wait for your name to be announced. Thank you. Once again, it is star one. Once again, to ask a telephone question, it is star one. Our next telephone question is from Anthony Barich from S&P Global Commodity. Anthony, please ask your question.

Hi, just asking about, you mentioned that in passing about general market optimism for graphite with increasing EV sales and everything else led to you deciding to accelerate a larger expansion at the Vidalia plants in the US. So is that, what capacity is that to, and is that a larger expansion than what you've announced? Just to clarify that, please.

The final investment decision that was taken during the quarter was for the initial expansion to 11.25 thousand tonnes per annum. That is what the board has sanctioned to this point and that's what we're underway on construction with and fully funded for. The work that we will do as well concurrently this year is looking at a bankable feasibility study to expand to 45,000 tonnes per annum. The only work that's been sanctioned by the board at this stage is the feasibility study for that expansion. Once that feasibility study is completed this year, it will be up to the board to review the outcomes of that and look to potentially sanction the next phase of development.

Since there's no response from the questionnaire, once again, it is star one to ask a telephone question. Thank you. Anthony seems like he has responded.

Anthony, please go ahead. Sorry, just a very quick follow-up. Probably unrelated to that, though. I have heard from other graphite developers that there are reports from man-made makers in China, at least, that there seems to be some shift from synthetic to natural graphite because of the rising pet co-prices as a result of the Russian war and I was wondering whether you've seen any other indirect or direct flow-on effects to the graphite market from the whole Russia-Ukraine situation, whether it be supply chains or anything else?

Sure. So the first part of the question... related to a move from artificial to natural graphite anode materials, we do see that as a long-term trend anyway, which may have been, I guess, facilitated by some of the disruption. But COST and ESG components are seeing a move towards a higher proportion of natural graphite in the anode in the longer term. So it's a shift that we already saw as being underway. In terms of other disruptions from the Ukraine-Russia conflict, There have been supply challenges out of Ukraine and Russia, and they do supply coarse flake into the European market. That has seen some strengthening of demand and price for coarse flake. So that's been the primary impact. The conflict has impacted shipping availability and cost over the top of the disruption that's already occurring due to COVID and some of the trade flow challenges that exist.

And once again, it's star one if you wish to ask a question. Thank you. Pardon me, there's no further questions at this time. I'd now like to hand the call back to Mr. Sean Verona for closing remarks. Please go ahead.

Thanks very much. We appreciate the participation. I know it's a busy day with a number of quarterlies. So thank you all for dialling in and we look forward to keeping everyone updated in the coming quarters. Thank you.

Thank you very much. This does conclude today's conference call. Thank you for all participating. You may all disconnect and have a great day. Goodbye.