Syrah Resources Limited

Thank you for standing by and welcome to the SIRA Resources Limited Q2 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.

Good morning and thank you for joining the call today. With me on the call are Stephen Wells, our Chief Financial Officer, and Viren Heera, our GM of Investor Relations and Business Development. Thira continues to balance great opportunity in strategic development with near-term market challenge and dynamic operational adjustments as we drive customer, government and competitor engagement. SARA demonstrates increasing differentiation from both Chinese anode material supply and new ex-China projects. It's clear that the development of market conditions in the first half of 2023 have not been what was expected, nor where we want to be. But we are adjusting to deal with the situation. And at the same time, there are positive structural shifts in regional demand and risk diversification underway. that work strongly in Syrah's longer-term favour, driven by government policy and company strategies. Our investment in maintaining progress now and readying for auto OEM and battery manufacturer requirements ex-China are key to shareholder value growth. The June 2023 quarter was notable for numerous reasons. Firstly, ongoing Chinese market behaviour, which has seen subsidised and somewhat economically irrational investments, in artificial graphite capacity, leading to loss-making and inefficient market behaviour from artificial graphite producers, as well as an increasing industry emissions intensity, much of which runs counter to the intent and requirements of downstream buyers. Secondly, the Chinese natural graphite market adjustments in purchasing behaviour and capacity utilisation seeing financial pressure on major spherical producers. In response, SARA has driven a BALAMA operating mode review, defining a path to cash flow break-even production for periods where market imbalance requires lower volumes of supply. Strong progression with the development of current and future active anode material production capacity at Bardalia, with the approaching commencement of the initial expansion and increasing commercial tension for expanded future supply. and refinement of our medium-term marketing strategy in response to the emergence of ex-China active anode material project capacity and auto and battery manufacturer requirements for securing upstream supply volume, which is a new development. At the same time, we've ensured capability to navigate the volatile market conditions and result in operational and project requirements through additional funding optionality. The challenges faced are in many ways illustrative of opportunities that SARA can capitalize on. Development timelines for both upstream natural graphite and downstream active anode material capacity are long, and development of market knowledge and participation is challenging. Building operating expertise and accommodating the realities of a market expanding at an extraordinary pace and dominated by China can provide unique positioning with high-quality counterparties. Capital costs for resources projects continue to increase, demonstrating the value of capacity utilisation of sunk capital. And customers and governments ex-China are now crystal clear on the limited options for and value of credible ex-China active anode material supply. I acknowledge that both the volatility of this journey and the commitment required from our investors, our team and our stakeholders is significant. That commitment will be rewarded with uniquely differentiated asset positions, long life and growth optionality and a market position which after the pain of development we believe will provide years of competitive advantage. Turning first to the immediate market conditions and we'll reference slides seven and eight of today's presentation pack. As discussed last quarter, Chinese natural graphite demand unexpectedly weakened through the first quarter of 2023 with lower natural graphite anode production and continuing imbalances in the supply chain. And this situation continued for most of the second quarter. The demand profile in natural graphite remains uncertain with low downstream visibility and weaker sales orders. But we saw some early signs of improvement as the quarter developed. Positively, the downstream drivers of natural graphite demand are improving. Global EV sales grew 25% in the second quarter from the first quarter and 55% year-on-year to approximately 3.4 million units. Stronger EV sales, and higher production of lithium ion battery cells after a significant reduction in cell inventory levels are indicators of reinvigorated consumption of anode material. Overall anode production increased 9% from the second quarter, sequentially from the first quarter, and 23% year on year as orders from lithium ion battery cell producers started to recover. Anode production growth has lagged EV sales growth, illustrating that downstream inventory consumption is occurring. However, there is significant pricing pressure in the Chinese anode material market caused by aggressive and, in our view, unsustainable behaviour from artificial graphite producers. This has impacted the natural graphite active anode material and upstream markets in the near term. This key development in the anode market over the past 12 months has seen the entry of new artificial graphite capacity and lower production costs for artificial graphite in China. Needle coke and other lower quality input material prices, lower power costs and the entry of new graphitization capacity in China moved production costs lower. Aggressive pricing saw artificial graphite anode material volumes increase in the second half of 2022 and into 2023 as new entrants sought market share to allow production continuity and to demonstrate product quality and operating reliability to their customers. The intensive competition amongst new and incumbent artificial graphite anode material producers has led to higher volumes of sometimes lower quality products being supplied And in the view of many market participants, unsustainably low prices for low-density artificial graphite anode materials, which are in some cases at or below the cost of production. As we noted last quarter, even the major Chinese active anode material producers are experiencing margin pressure. For the first time, artificial graphite anode material prices have converged to natural graphite anode material prices. This may, however, be short-lived as any increase in power, graphitisation or coke costs and present cyclical low points or consolidation of marginal supply will drive artificial graphite prices higher, which will accordingly support natural graphite anode material demand and pricing. Natural graphite production in China increased seasonally in the June 2023 quarter. And this combined with the impacts of artificial graphite anode production resulted in reported natural graphite prices falling by around 20% since the beginning of the calendar year. However, Benchmark Minerals reports that lower grade ore, poorer recoveries, and environmental management cost factors have driven domestic natural graphite production costs to parity with current market pricing. Natural graphite supply chain inventories are reported to have increased somewhat with domestic production rising but have been offset by both reduced imports from Madagascar due to challenges associated with a new 10% export tariff and increased sales from previously warehoused stock in China. The Chinese active anode material supply chain appears to be at an unsustainably low price point across various product segments. There's pressure on artificial graphite anode material price versus production costs, low spherical graphite processing capacity utilisation due to cost of processing exceeding prices, and cost pressures on Chinese domestic natural graphite production. Increased active anode material demand driven by recovering EV sales will therefore require higher prices to incentivise increased production. And irrespective of this short-term narrow pricing differential, The ESG profile of artificial graphite production remains deeply challenging given the power usage and emissions intensity from the process of graphitising cokes at 3,000 degrees for up to a month. So whilst current conditions in the Chinese anode market are challenging for us, there are many indicators of strengthening from here. Firstly, strength in EV sales growth has returned this quarter and expectations for half two sales are positive. Battery cell inventory consumption is occurring and capacity utilisation is increasing. Anode production is growing at a slower pace than EV sales growth and downstream inventory positions are therefore being cleared. Whilst excess production capacity, intensive price-based competition and lower input costs have seen natural graphite and artificial graphite anode material prices converge, resulting in some cost-based switching in China. The prevailing artificial graphite price is unlikely to be sustainable, which will lead to demand and pricing support for natural graphite anode materials. And the emissions intensity impacts of low quality input materials, shorter cycle times and lower quality products are becoming evident within artificial graphite supply chains, especially outside China. And these items should all assist in rebalancing the markets. The longer-term opportunity for natural graphite ends for SARA are even more positive. Overall, EV demand growth continues to build and active anode material inventories will continue to clear. The June 2023 global EV sales were well above a million units and has been a positive trend for more than three months. Chinese natural graphite active anode material capacity growth and utilization are increasing. and they require feed. A number of new natural graphite active anode material projects will enter production this year and into 2024. The U.S. Inflation Reduction Act means that active anode material producers are accelerating plans to build capacity offshore with projects in Korea, the U.S., India, Europe, and Indonesia, and all of those which will require ex-China third-party feed. Chinese mine capacity growth has been low and grade and cost pressures are continuing challenges. And finally, the ESG implications as well as technical characteristics, customer preferences and lower through the cycle costs of production mean that significant volumes of natural graphite will be required in both China and the ex-China markets. The implications for Syrah today are that the company will continue to focus on immediate natural graphite sales from inventory and implementing cost reduction initiatives at Valama to operate at the lowest possible cost. Valama production has moved to campaign mode in line with demand and prices, and where we're producing, averaging at least 10,000 tonnes a month for restocking and for direct shipment sales. And we'll continue to be clear with customers on the prices required for sustainable supply of our products, considering operating costs at this production volume. Steve will now provide some comments on Bulama's operational and cost performance in the quarter. And over to you, Steve. Thanks, Sean.

Significantly lower sales to Chinese anode customers and inventory positions in Mozambique and offshore led to Bulama production being paused in May and June. This decision was made to allow for downstream inventory consumption to occur and natural graphite demand conditions to improve. The plant was operated through a relatively uninterrupted campaign at approximately 50% capacity in April to produce 15,000 tonnes of natural graphite. Recovery and quality in April improved compared with the first quarter, with greater consistency in all feed processing stability and operational continuity through the campaign. T1 costs were $565 per tonne at 15,000 tonnes production for April. which was significantly lower compared to the first quarter despite the impact of lower production and higher diesel costs. Stronger operational performance illustrates what can be achieved at Bulama when the operations team can run without interruptions due to shipping or inventory constraints. In addition to developing a plan to operate consistently, SARA also completed a COO-led deep review and recommitment to the improvement actions on both the recovery bridge and equipment maintenance projects and cost containment at site through the first four months of this year. The Mozambique wholesale diesel price, which is set by the government, has remained higher and was increased in April against expectations. SARA is engaging with authorities regarding the government-mandated wholesale diesel price, which is inconsistent with the reset to lower retail diesel and petrol prices, as well as refined petroleum market prices globally. While SARA paused production, The company completed inspections and brought forward planned equipment maintenance with reduced operating personnel on site. We are focusing on strengthening plant reliability and identifying and implementing operational efficiencies during the production pause. Pleasingly, construction of the 11.25 megawatt solar array and the eight and a half megawatt battery system at Balaama is now complete and operational testing is underway. Commercial operation of the system is planned for August 2023 which will further assist in maintenance of lower production costs and reduce emissions intensity. Otherwise, at Balaama during the last quarter, SARA continued its high performance in sustainability activities, as noted in our quarterly sustainability report, which was released on our website today, and the recent security environment across Cabo Delgado has shown an improvement since last year. I'll now pass you back to Sean.