Syrah Resources Limited

Thank you for standing by and welcome to the CSIRO Resources Limited Q1 quarterly results update 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.

Thanks very much. Good morning and thank you for joining the call today. With me on the call are Stephen Wells, our Chief Financial Officer, and Veer Nahira, our GM of Investor Relations and Business Development. The March 2023 quarter has seen strong progress on the downstream expansion project construction and the further expansion project DFS released today. But the recent development of volatile market conditions facing Valama has created further challenge in reaching positive operating cash flow. The quarter and the period ahead encapsulate everything that's unique about the development graphite and anode position in the lithium-ion battery supply chain. Enormous opportunity, rapid learning and the need to adapt short-term actions within longer-term strategy. Amidst the positives of lower freight rates and increased shipping availability, the short-term natural graphite market situation has weakened as somewhat slower momentum in year-on-year EV growth has fed through to lower than anticipated sales volumes. Pressure on price from inventory across the supply chain has resulted in lower production and sales and too high a C1 cost. On the other hand, The ever-growing downstream opportunity is highlighted by a continuing extraordinary battery manufacturing capacity build-out from the US and strong market and government support for Syrah's AAM capacity expansion, providing an increasingly positive market position for Syrah as an ex-China anode supplier. The short term is dominated by a China supply chain exhibiting challenging commercial behaviour, as incumbents and new entrants drive for anode market share through natural and synthetic graphite procurement and production. Accordingly, we've taken steps to strengthen the company's balance sheet to be well prepared for any further potential natural graphite market volatility, whilst ensuring project construction and development momentum in the US are maintained as we head toward a final investment decision for the next phase of Bardalia's developments. We'll divert a little today from our standard quarterly structure and cover three main areas. Firstly, a more detailed look at the natural graphite market conditions and the immediate challenges in front of us, both in navigating the situation commercially and how we think about Belama's operating methodology to best deal with dynamic volume requirements and unit cost reduction when demand is lower. Secondly, the progress and exciting future for our Vardalia operation and project development, looking at the DFS release for the Vardalia further expansion project to take the next step in growth and diversify our business towards the downstream. And thirdly, outlining our near-term cash position and how we intend to navigate funding requirements to provide the best optionality in line with expected milestones with the support of Australian Super, our largest shareholder. These three elements combine to chart the path to a final investment decision for Vardalia as customer and funding arrangements are finalised, and that's anticipated before the end of the 2023 calendar year. So turning first to the market, and we'll look at slides seven and eight of today's presentation pack. As noted during the last quarterly update, visibility of China's natural graphite demand and anode production was poor in the early part of the first quarter, impacted by both the COVID-19 reopening and Chinese New Year holidays. Uncertainty continued and market volatility increased during the quarter and since quarter end. Analysis of the major drivers of natural graphite demand and pricing demonstrates the leading indicators of EV sales, and anode material production, whilst growing strongly year-on-year, weakens considerably quarter-on-quarter in the March 2023 quarter. And the year-on-year growth rate at 32%, while still strong, was lower than the full rate of 64% last year. Battery cell production growth rates in China have outpaced consumption. An analysis demonstrates that even with some higher scrapping rates due to new production quality, apparent cell inventory grew through the latter part of 2022, leading to a slowing of delivery requirements and spot market liquidity for anode material and natural graphite so far in 2023. This is not unique to anode material and graphite, as the significant spot price declines in other battery materials such as cobalt and lithium show, the difference, of course, being higher prices earlier in some of those other markets. Anode material production increased 94% year-on-year in 2022, and similar to cell production, outpaced EV demand growth, which led to apparent inventory build-up towards the end of 2022, with the gap visible in the top left chart on slide 8. Anode material production fell around 23% quarter-on-quarter between the Dec 22 and March 23 quarters. Over the past two years, the two major Chinese anode material producers have seen five times and two times volume growth and 20% to 30% decline in margins. Domestic competition in China is hurting even the strongest producers as it expands, and new domestic entrants are under significant pressure since they seek market share. Anode material margins decreased for the top six producers in China last year, five of the top six producers in China last year, and they were flat for the sixth. Chinese artificial graphite anode production capacity growth has been stronger than natural growth over the past two years. Given both the lack of growth in domestic natural graphite mine supply and the constraints on delivery from Syrah during that same period due to shipping, Natural graphite processing capacity utilisation has lagged somewhat, with the anode material demand gap being filled by high emissions, power-intense artificial graphite products. As that capacity expanded, inventory built, and this has seen intense Chinese domestic price competition for market share in artificial graphite, with prices falling faster than declines in the key costs of artificial graphite anode production. Needle coke power costs and the resultant rapidisation costs in China have declined and are back at or below 2020 levels, falling 50% from their peak. Whilst in the ex-China markets for battery cells, our experience shows that there's little flexibility for short-term cost-based switching between anode material types, the Chinese domestic cell production market may have a higher tolerance and though both constrained natural graphite supply and a decrease in the cost of artificial graphite anode have been in place, some switching appears to have occurred in the short term. In conjunction with overall inventory levels across the anode market, this may have contributed to weaker near-term demand for natural graphite anode products. Spherical graphite processing capacity in... For natural graphite anode material in China, which is largely independent of integrated mine supply, has expanded in recent years and additional capacity in natural graphite anode material production is under construction today, which bodes well for future import demand for siren. The Chinese natural graphite anode supply chain remains disaggregated with separation of entities between mining, beneficiating order concentrate, processing spherical graphite and producing anode. And whilst there are some integrated projects, many are reliant on upstream third-party sourcing of natural graphite domestically and on import, and that's primarily from CSIRO. Domestic production of natural graphite in China is seasonal, with mining closures during the northern winter. And that can be seen in the top right chart on slide eight. Historically, this has led to consumers building stock through the year and supply being very tight through winter with increased prices. especially as anode material became a larger demand segment. Over the 2022-23 northern winter, this supply tightness appears not to have occurred due to a combination of the anode inventory impacts mentioned earlier, spherical production capacity outages during the COVID reopening, and due to a shorter and warmer winter outage period than normal. As the first quarter of 2021 23 evolved and China reopened, downward pricing pressure built over the period of the year when pricing has historically almost always increased. And this wasn't fully evident until recent weeks as spot market liquidity had been relatively low. On a positive note, despite the significant increase in natural graphite demand driven by EV market growth, overall Chinese domestic mine supply for natural graphite has not increased meaningfully over the past three years. And Syrah is the primary balancing market tonnage in China as demand has grown. This can be seen by the price increase when the market's in a net import position, which is shown in the bottom right chart on slide nine. On slide eight, sorry. In addition, product grade and particle size distribution position Syrah's Belama product strongly for anode material production, particularly when power and reagent costs are high. and environmental restrictions are apparent. And as demand continues to grow, SARA's importance and position on the cost curve and higher utilizations is extraordinarily valuable. The near-term reality now apparent in April is that inventory overhang in cell and anode production has been more significant than anticipated. And as late Q1 and April have evolved, sales volumes have lagged and deferred. Price bids have declined recently and current inventory will see SARA communicate a position of moderating production where purchase bids fall below a level that would support basket pricing above cost of production at sustainable volumes. So in summary, bringing that position together, a number of factors are impacting us in the short term. EV sales growth, while still strong, has slowed pace year on year and quarter on quarter. Anode material inventory built up through 2022 has consequently taken longer to clear. Anode material producers have been able to secure cheaper graphitization costs in artificial graphite. And all of this occurred during the normal winter production outage for natural graphite in China. China had a shorter and warmer winter with supply capacity capable of returning earlier. And whilst China domestic production is online, in many cases at the moment, cost of production is reported to exceed current price fees. Syrah's experience of Chinese customer purchasing behaviour remains extremely short-term and herd-like, and that leads to volatile contract performance and creates a whipsaw effect in market conditions. There are very positive factors ahead. Overall, EV demand growth continues. and anode material inventory will clear. March 2023 global EV sales were again above a million units, matching the run rate late in 2022. Chinese natural graphite anode material capacity is increasing, and that requires speed. Chinese mine capacity growth has been low, and grade remains a challenge. Chinese mines are reported to be under cost pressure, and the US Inflation Reduction Act means that anode material producers are accelerating plans to build capacity offshore in places like Korea, the US, and Indonesia that require ex-China third-party fees. Finally, ESG implications mean that higher volumes of natural graphite over more power-intensive artificial graphite will be preferred in ex-China markets. So the implications for SARA today are that in the short term, China inventory rundown time is required. and recovery of EV demand growth needs to flow through to anode material demand. SARA will focus on immediate sales from inventory and cost reduction at operations, inclusive of requirements for our solar and battery plant start-up this quarter, and will review a broader suite of BALAMA operating methodology options to determine how the operation can respond to market conditions more dynamically while focusing on quarterly production costs and margin generation. And we'll continue to reiterate a clear requirement around pricing compared to cost at a sustainable production volume. I'll hand over to Steve to make a couple of initial comments here on the LAMA before we talk some more about those operating options.

Steve? Thanks, Sean. Looking at slides 11 to 14, the ongoing volatility in sales volumes, inventory levels and resultant production throughput impacted operating performance of Bulama during the quarter, and recoveries and unit costs underperformed the improving trend developed through 2022. And as a result, this month has seen a COO-led deep review and recommitment to the improvement actions on both the recovery bridge and equipment management projects and to cost containment at site. Bulama production volume in the first quarter was 41,000 tonnes, which is higher than sales, but key metric performance was lower than prior quarters, with recovery at 71% and C1 costs of $668 per tonne, primarily due to production volume impacts and diesel costs. March performance showed improvement, with recoveries at 76% on higher monthly production. The primary issue for the Bulama operations team is that they have started each recent quarter with the view of being able to run hard on an increasingly positive market outlook, but have been repeatedly interrupted in operational continuity due to shipping or market-led inventory constraints. As a result, the company has three key actions underway at Bulama. Firstly, reinvigorating our embedded continuous improvement processes to regain the performance improvement trend of last year. Secondly, assessment of operating methodology options to maximise efficient volume production and minimise costs. And solar is a key step in this front for the current quarter. and we will continue to find alternatives to improve our production costs in periods of volatile demand. And thirdly, leadership and cultural development actions to leverage the momentum out of the company-level agreement negotiations of the fourth quarter in last year. There is a strong commitment from the team to deliver improved performance with a clear operating runway, and I'll now pass you back to Sean. Thanks.