Syrah Resources Limited

Thank you for standing by and welcome to the CERA Resources Q3 quarterly conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Sean Verner, Managing Director and CEO. Please go ahead.

Good morning and thank you all for dialing 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 September 2022 quarterly results covering operations, market conditions, the Vidalia initial expansion project, and the outlook for natural graphite, active anode material, and their end-use markets, and we'll use the slide deck we released today to guide through this discussion. It's clearly been an eventful period for the company, and in some ways that's indicative of the EV and battery markets overall. In short, there is a clear gap between the shorter lead times for battery manufacturing capacity development versus the raw materials, the downstream processing capacity and localisation that's required to facilitate them. Customers, investors and other public stakeholders, I think, are increasingly aware of what that means for supply and for prices in future. And the broader macroeconomic and geopolitical trends are making development and expansion more complex and, in some cases, more expensive. Syrah has a significant incumbency advantage and is advancing towards becoming a large-scale, vertically integrated natural graphite anode material supplier. A favourable upstream market setting for natural graphite is translating well to high demand for Valama products. Summarising the company's position, we're a key participant in the global graphite market already, and that market's expected to grow by four times over the next 10 years, and the lithium-ion battery anode material market, which is expected to grow by eight times. Syrah is the only vertically integrated natural graphite anode material supplier outside of China that's producing anode material into qualification and producing upstream material that's sold into the Chinese market. Our Balama natural graphite operation in Mozambique is unique in its in its place in the graphite industry with 350,000 tonnes per annum production capacity in a global natural graphite market of approximately 1.3 million tonnes per year currently. We've spent a lot of time talking about Balama and for many years it's fair to say that the operation was too big and had potentially been constructed too early. But the market growth to support it is well and truly here. Potential ex-China competitors with significant volume are still some way from production, especially where downstream integration is part of their plans. And Bulama at 350,000 tonnes per annum is based on reserves with a 50-year mine life, and there's significant growth potential through the resource base. Vidalia is the site of our downstream active anode material facility in Louisiana, and we've been operating there since 2018. We've had material in qualification and testing with auto OEMs and battery manufacturers for the last year and a half. And the first phase of commercial expansion is underway, which will deliver us 11.25 thousand tonnes capacity for active anode material production. We're concurrently completing a definitive feasibility study, DFS, for expansion to 45 thousand tonnes per annum. underpinned by market demand, by regulatory tailwinds and, as we're announcing today, increased customer interest and further government support. CSIRA really has a unique position. The fact that we are the first vertically integrated natural graphite anode material operation in the United States has been tremendously important for our development because it's resulted in extensive engagement with potential customers. Our cost position from an OPEX perspective at Dahlia for anode material is roughly competitive with China. CAPEX is more expensive, but there's no surprise in that CAPEX challenge, and that's something that we've planned for from the outset. And with Philama in the upstream, the size of the asset is such that at full capacity will be a first quartile cost producer with significant expansion potential. Governments. Industry participants and markets recognise the key role of critical minerals, such as graphite, in facilitating transport electrification and energy storage development toward the objective of reducing global carbon emissions. And in August this year, the US government passed the historic Inflation Reduction Act of 2022, the largest climate-focused legislation ever in the US. The Inflation Reduction Act offers significant tax credits and financial support to end users of EVs and material producers to mobilise the development of a domestic battery and battery raw materials supply chain and to accelerate the adoption of EVs in the US. And we expect that Vidalia active anode material will qualify as a critical mineral processed in the US for the EV tax credit under this Act underpinning demand for Vidalia products and that our US operating subsidiary will also qualify for direct tax credits. Moving to slide five, our environmental, social and governance activities are fundamental to our company and every quarter that passes highlights just how critical this focus is and how critical our commitments are. Given the recent industrial action at Balaama, I wanted to take some time here to talk about our approach and commitments in Mozambique and ensure that the value to local, provincial and national communities and country are really clearly communicated. Our commitment to local employee development is enormous. Of over 1,400 direct and contractor employees, 98% are Mozambican and 49% are from the eight local host communities around Balama. We have a localisation focus and a demonstrated history of skills and career development. Our two general managers in country and many of our senior leaders are Mozambican, and we have invested heavily in training and development right from the outset of the project. We have an active union covering the majority of the Bulama workforce and a company-level collective agreement ratified by the labour authorities in Mozambique covering our employment conditions. Since BALAMA's inception, our total economic contribution to Mozambique has been over US$280 million, and we're deeply committed to improving education, health and sustainable income generation in the district through our Local Development Committee, which has a number of capital and skills development projects. Success at BALAMA has to come hand in hand with our employee, community and government relationships. Given the very long-term nature of the asset, we are taking the time to ensure that we continue to get them right. Moving over to emissions intensity, a critical panel review of our MnBIRO independent lifecycle assessment for our integrated operations was completed in the third quarter. And Minviro has evaluated that Vidalia anode material and Balama natural graphite products have a 50% to 70% lower global warming potential in production processes compared with benchmarked Chinese supply routes, which currently account for most of global production. And this clearly demonstrates the differentiated sustainability credentials of Syrah's natural graphite and our anode material products. To further strengthen ESG performance, we intend to undertake an independent third-party audit of BALAMA against the Initiative for Responsible Mining Assurance and the Standard for Responsible Mining under IRMA. And that's one of the most comprehensive and rigorous mining standards in the world. SARA believes that in partnership with our key stakeholders, we've built a really strong foundation and we will be able to achieve an IRMA certification level and we're highly focused on moving through that in the coming months. Our health, safety and environment performance at Balaama remains outstanding. Our total recordable injury frequency rate was one at quarter end and the Balaama TRIFA has remained no greater than one since late 2018. Now, Trifor at Bardalia, where there's obviously far fewer employees and contractors, was 8.8 at the quarter end, and there were no lost time injuries sustained at the site through the quarter, with significant hours spent on the expansion project. We'll now move to the highlights for the quarter, and I'll hand over here to Steve to make some comments on the corporate position and the market context. Over to you, Steve.

Thank you, Sean, and good morning, everyone. Significantly for the quarter, we are pleased to report a positive net operating margin at Balaama after C1 and C2 costs. This is a result of record sales of 55,000 tonnes for the quarter at a high weighted average price of $688 per tonne and lower C1 total costs due to lower Balaama production of 38,000 tonnes for the quarter. In terms of Balaama, we were able to produce at our minimum production rate target of 15,000 tonnes per month through July and August and prior to interruption in September for a total of 38,000 tonnes for the quarter. With the three additional break bulk vessels during the quarter, we achieved record sales of 55,000 tonnes, which were again materially higher than the previous quarter. However, we want to continue to grow sales volumes and production, which was still somewhat constrained by container shipping and unexpected interruption in that area. Approximately 5,000 tonnes in shipments slipped into the first week of the fourth quarter, which otherwise would have taken total sales to 60,000 tonnes. We will continue to execute further break bulk shipments and increase container shipments to expand sales volumes as shipping and market allows. While C1 unit costs were higher than expected due in part to these lower production volumes, as well as fuel price inflation, basket pricing and sales volumes were higher. Shipping costs remain three to four times our long-term historical average levels. However, container marketing additions through the quarter end have begun to improve, with freight rates declining and availability increasing. Over the short to medium term, we expect shipping costs to moderate, with a normalization in the shipping market, while current price support for natural graphite based on market factors is strong. Syrah finished the third quarter with a cash balance of US $136 million, compared to $168 million at the end of the second quarter. Total quarter cash outflows for CSIRA were $33 million versus $37 million last quarter, with approximately $28 million being related to investing activities. Pleasingly, from a project perspective, the daily cash outflows increased from $14 million in the second quarter to $25 million in the third quarter, with remaining cash outflow relating to Balaama working capital and investment and corporate costs. Syrah is progressing debt funding processes with the US Department of Energy and DSC on funding requirements for Vidalia and Bulama respectively. We see significant benefit to the company from these funding processes and in July, Syrah entered into binding documentation for a loan facility of up to $102 million from the US DOE to support financing of Vidalia's initial expansion project. The proposed loan is to be made under DOE's Advanced Technology Vehicles Manufacturing Loan Program, and the loan has highly attractive terms with capitalized interest and deferred debt servicing until October 2024, interest costs at long-dated U.S. Treasury rates, and a 10-year term. The company and DOE are targeting the first advance from the loan within the December 2022 quarter, aligned with the capital spending program for the Vidalia initial expansion project. This is the first loan from the ATVM program for 11 years and the first loan out of that program ever to a materials processing company. Today we are also very pleased to announce that SARA has been selected for a DOE grant of up to $220 million to support funding for the potential further expansion of Adalia to a 45,000 tonnes per annum AAM capacity. The DOE grant program that SARA has been selected for is aimed at developing a viable battery materials processing and battery manufacturing position in the US with funding appropriate by the bipartisan infrastructure law. If successfully concluded, a DOE grant will be highly attractive to the company and is expected to fund a significant proportion of capital costs for Vidalia's potential further expansion to that 45,000 tonnes per annum AAM production capacity. We will work with the DOE to finalise a binding funding agreement for this DOE grant. Moving to slide seven and current marketing conditions, the end market setting in 2022 year to date continues to be outstanding, with strong momentum in EV production and sales globally, and with broad-based electrification of model ranges planned by major automakers this decade, the trend is likely to continue. To underpin this and the substantial energy transition, further large commitments are being made to develop battery manufacturing capacity across the globe, including in North America, and regionalisation of supply chain remains a major trend in the EV and battery supply chain. Positive momentum continued in our key leading indicator, EV sales, in the third quarter despite the global economic headwinds. Global EV sales grew 68% in the quarter against Q3 2021 to approximately 2.8 million units with record sales of above 1 million units globally in September. EV sales and battery demand growth are driving demand for anode material, as shown by total Chinese AAM production increasing to above 130,000 tonnes per month and achieving new monthly production records once again during the quarter. The trend in this area continues to be very strong and our broad interactions with spherical graphite processes in China and increasing flake imports demonstrates robust forward demand. A strong market setting for natural graphite is evident with stable pricing, even with natural graphite production in China returning to normalised output levels during the peak seasonal production period, but still well below typical annual production volumes due to events earlier in the year, and therefore likely lower inventories than would normally be the case heading into the fourth quarter. As we move into the fourth quarter, Chinese domestic production typically seasonally shuts down, and with strong demand and absent higher inventory levels, higher Chinese natural graphite imports, principally from Mozambique and Madagascar, are likely to be required to satisfy demand ahead of the winter period of lower Chinese production. Syrah's forward sales orders are substantial at 70,000 tonnes, alongside the record sales of 55,000 tonnes this quarter. Syrah's forward sales orders indicate growing customer concern regarding Chinese natural graphite production availability and market balance. Moving to slide eight, This slide provides an updated perspective on regional battery manufacturing capacity pipeline forecasts and announcements. The growth ahead for the industry continues to strengthen, providing a very strong backdrop for the company to increase production capacity utilisation at the llama and a great setting for the various stages of expansion, which are increasingly supported by governments, the regulatory environment and, of course, customers. I'll now hand you back to Sean.