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.

Thanks, Stephen. I'll continue on slide 12 of the PACT talk further about the operating mode review. Daira's near-term dependence on China sales means that it's been necessary to review what constitutes a sustainable Balama operating mode during periods of supply and demand volatility. The company has completed a deep review of more dynamic Balama operating scenarios at lower production volumes to generate sustainable operating costs and cash flow outcomes. We've implemented measures identified in this review progressively to be fully available during the current quarter. Key driver of cost efficiencies is fixed 30-day high-capacity production campaigns, followed by shutdown periods, the duration of which will be determined by inventory levels. Other key initiatives include renegotiating some operating contract parameters, freezing hiring, optimising workforce rostering for campaign operations, and maximising the use of solar energy to reduce diesel consumption and costs. Implementation of these cost-saving initiatives is expected to deliver Bulama C1 cost guidance, FOB, NACALA or PEMBA, of between $580 and $620 a tonne, at a much lower 10,000 tonnes per month average production rate. Through the production campaign and shutdown periods, the lower end of the range assuming a lower than current diesel price. This is the equivalent of around $380 to $425 per tonne at a 20,000 tonne production rate during the campaign operation, which is a major improvement on where we were. Implementation of this operating mode will have no impact on employment levels beyond the hiring freeze. It will ensure ongoing high standards of health and safety and maintains our commitment to communities. Companies also reviewed an operating mode where sales and inventory constraints on production extend beyond the end of 2023 to further conserve cash if that becomes required. The timing of production campaigns will be dependent on sales from inventory, new sales order levels and prices, and market conditions are likely to support one 30-day campaign in the current quarter. Moving on to Bulama sales and marketing on slide 15. Natural graphite sales to third-party customers for the second quarter were 15,000 tonnes. Low demand into Chinese anode customers led to lower overall natural graphite sales during the quarter. Coarse flake demand remained strong, and SARA undertook fine sales from inventory later in the quarter. No break-bulk shipments were completed, and container shipping capacity was available, with freight rates continuing to moderate. We commenced shipments of fines from Balama to Vardalia, readying for transition to operations, with a total of 2,000 tonnes shipped to the US in the second quarter. The weighted average sales price to third-party customers for the second quarter was $688 a tonne SIF, supported by a higher proportion of coarse flake sales and prices, offset by lower fines prices and demand compared to the March 2023 quarter. Fine sales accounted for approximately 19% of product sales for third-party customers, which was significantly lower than the last quarter. Moving to developments in SARA's medium-term marketing strategy for natural graphite on slide 16, US and European demand for diversification of active anode material sourcing is accelerating. mitigate geopolitical risk to reduce soil reliance on China and satisfy requirements of government policy programs. This has resulted in the pipeline of ex-China natural graphite active anode material capital projects growing over the past 12 months and the last few months has seen significant commercial activity as these projects seek long-term supply to underpin their investment approvals. These projects comprised both new players and existing supply chain participants who are either vertically integrating or extending their geographic footprint. And we're engaged with three projects in the US, two in South Korea, two in Europe, and other projects in Indonesia and India, with greater demand for natural graphite in new markets evident from 2024 onwards. Tyra's marketing strategy will accordingly balance integrated consumption through Vidalia, with an increasing proportion of sales volume ex-China and residual sales volumes to China in future. Commercial arrangements for SARA's future ex-China supply of natural graphite are already in place with two anode projects and negotiations continue with others. I'll move now to the Vidalia active anode material expansion projects on slide 17. I've just returned from the Vidalia site last week and I saw the excellent job that our team is doing and the substantial progress in the 11.25 thousand tonne project which is the first of its kind integrated through spherical and anode material production outside of China at commercial scale. Civil and structural work is very well progressed facilitating equipment installation and mechanical milestone deliveries. Piping and electrical and instrumentation work is proceeding at high intensity across all areas of the facility, with the on-site contractor workforce approaching 350 people across two shifts. All overseas and domestic major equipment deliveries are complete, with the remaining inputs being sourced domestically in the U.S. Key milestones progressed during the second quarter were structural steel erection, ducting assembly and equipment installation in the milling and furnace buildings, field fabrication of process tanks and piping installation for the purification area, and delivery and mounting of the second power distribution centre. Milling and furnace operating areas and all support infrastructure are expected to be mechanically completed and ready for staggered commissioning and commencement of operations by the end of this quarter. However, mechanical completion of the purification area has been affected by the late domestic supply of specialty piping due to storm impacts at the supplier's Oklahoma manufacturing location. As a result, final mechanical completion and commissioning of the facility overall and the first active anode material production will now be within the December 2023 quarter. Operational readiness for the facility, which includes preparing business and maintenance systems and operating teams to move from commissioning to operations, is on track to support the planned commissioning schedule and activities. The total Vardalia employees were 78 at the quarter end, with recruitment confirmed for the majority of the further 25 roles prior to the start of production. As disclosed in the recent general meeting notice, CSIRA has revised the total installed capital cost estimate of the Vidalia initial expansion project during the June 2023 quarter to US $190 million, assuming the full utilization of the project contingency. And that represents a 5% increase from the previous estimate of $180 million and a relatively modest 8% increase from the FID estimate. This escalation is primarily associated with unanticipated labor intensity and construction costs to maintain the project schedule and higher than expected costs for certain structural materials. At Porter End, US $127 million of project capital costs have been spent on the Vidalia initial expansion project. Moving on to the further expansion project. In early Q2, SARA announced the completion of the DFS for the expansion of Vidalia's production to 45,000 tonnes per annum active anode material, inclusive of the 11.25 thousand tonne facility that's been commissioned this year. The DFS demonstrated capital efficiency, notwithstanding the higher CAPEX and prior estimates, OPEX economies of scale, and estimated that project economics were compelling across a realistic anode material price range. SARA has commenced transition preparation Permitting acquisition of adjacent land and other early activities ahead of an FID proposal on the Vidalia further expansion project to be considered by the SARA report. SARA is targeting readiness for FID during the second half of this year. Timing will be determined by customer and financing commitments as well as consideration of equity market conditions. Detailed engineering, long lead items and other procurement and construction activities will follow a CSIRA board approved FRD sequentially. This further planned expansion of CSIRA's wholly owned and integrated spherical purification and furnace operation at Vidalia, which uses natural graphite from Balama, is generating commercial interest. It provides to US customers a combination of scale, diversification of sourcing risk, IRA compliant domestically processed product, and a fully traceable lower emissions intensity production path than that of material from China. I'll now hand over to Steve again to talk about the financial position and the balance sheet report.

Steve? Thanks, Sean. Total cash at the end of the quarter was $101 million compared to $84 million at the end of the previous quarter. Restricted cash at the end of the quarter was $55 million U.S. dollars and represents cash balances held at the Vidalia project in operating accounts, loan accounts, including from the first and second drawdowns, and reserve accounts. This includes cash amounts in loan reserve accounts, which are typical of a project finance loan, as well as proceeds from a second drawdown of $44 million from the US Department of Energy loan facility during the quarter, which have not yet been used to fund project costs and which is reflected in the increase from $36 million last quarter. Unrestricted cash represents cash elsewhere in the group, other than the Vidalia initial expansion project, with uses of unrestricted cash including funding Balaama capital and working capital, corporate purposes, and any additional capital requirements for the Vidalia initial expansion, as well as growth initiatives. The unrestricted cash balance at the end of the quarter was $46 million, with cash outflow reflecting the pause in Balaama operations following production through the first quarter and April. which incurred both fixed and variable costs, while sales were lowered due to market conditions impacting sales receipts. In addition, there was an increase in the Vidalia initial expansion project capital budget, resulting in a transfer of funds to the project, offset by proceeds from the issue of convertible note series four. To provide liquidity in the continuing period of market uncertainty, CIRA announced in April up to $150 million Australian dollars in new convertible notes issuable to Australian super in three equal series. SARA issued the first $50 million Australian series on 12 May under placement capacity, and the company is seeking shareholder approval of resolutions at a general meeting later this month so that the remaining two series are unconditionally available for issue by SARA. As there has been no material improvement in natural graphite marking additions in the second quarter and subsequent to quarter end, And considering the $10 million increase in the total installed capital cost estimate for the Bedalia initial expansion project, Zyra will issue the second $50 million Australian dollar series of the new convertible notes in August 2023 if the shareholder resolutions are approved. No decision has yet been made regarding the issuance of the last convertible note series. Zyra is progressing funding processes with the US Department of Energy and Development Finance Corps on funding requirements for the Vidalia further expansion and Bulama respectively. We have submitted an application to the DOE for another loan to fund a significant portion of the Vidalia expansion project and we have received an updated indicative and non-binding term sheet for up to $150 million in debt financing for Bulama from the USDFC. I'll pass you back to Sean to make some concluding remarks.

Thanks, Steve. So despite the market challenges here, the opportunity ahead of the company remains significant, underpinned by EV growth and the quality of the Belama and Vidalia assets. In the near term, uncertain demand and challenges of Chinese natural graphite market behavior and surplus synthetic graphite anode material capacity have frustrated our drive toward positive operating cash flow. But we know that this market can change very quickly and we are ready for that. In addition, the major opportunity of medium and long-term natural graphite anode material demand is clear. And within that, Syrah is the only major ex-China player this far progressed, both upstream and downstream. Valama remains the highest quality natural graphite asset globally and the one that has the best potential to be at the lowest end of the cost curve at volume. with ex-China end users now starting to seek direct supply. Ex-China merchant or third-party anode capacity will grow in the medium term, and we're well positioned to expand our fine sales to these quality customers to balance our sales to China starting from 2024, with some commercial arrangements already in place and more being negotiated. We've implemented sensible operating options for Bulama in light of the latest market challenges, And in the downstream at Vidalia, we're the only major ex-China integrated operator that is bringing product to market with an offtake in place. The progress of Vidalia's current construction and further expansion provide enormous opportunity and fundamentally differentiate Syrah from the competition. We've based this business on realistic market assessments and development experience in the anode interaction with the customer base. Current period of significant capital investment in volatile market conditions is not easy. We're not alone in the impacts emanating from the China market. But we do see catalysts through this half year with the potential for better market conditions, further contractual arrangements for both Vardalia anode material and increasingly for Valama finds, commencement of Vardalia commercial operations later this year, and readying for FID on the next phase of expansion. Our team is intensely focused on these catalysts to grow shareholder value. The improvement in EV growth and increased cell production are depleting downstream inventory positions, and we're confident that market improvement, project development, optionality of funding, and implementation of the revised operating mode at Valama will deliver the company the outcomes needed across various time horizons. Thank you, and we'll now move to Q&A.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Peter Cormody from Shaw & Partners. Please go ahead.

Good morning, Sean. Thanks for taking the question. I'm just interested in your comment earlier at Balaama that market conditions are likely to support one 30-day campaign in the current quarter. Can you just comment on what you're basing that expectation on? Is that likely to be early in the quarter or later in the quarter? And finally, where do you see inventory levels finishing the quarter at? Thanks.

Thanks. Our inventory levels have finished at 28,000 tonnes for the quarter. And as we said earlier, market inventory levels have come up a little bit in natural graphite because of the seasonal production of natural graphite in China. But they've been offset by lower Madagascan imports into China and some sales out of warehouses. in China as well. So we don't believe that there is a significant buildup of natural graphite inventory in China by any means. And we are starting to see the development of sales orders for natural graphite across the industry, both out of warehouse, through the traders and directly. That's what gives us the view that there will be room for one production campaign through the coming quarter, but we'll have to see how that demand profile continues to evolve. But the way EV sales are continuing to increase and sell orders are increasing, it does look like we can support at least one campaign this quarter.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Mark Fisher from Foster Stockbroking. Please go ahead.

Yeah, hi, Sean. Just a question on your cost guidance. I note that you're looking at a sort of 20,000 tonne production rate, a cost of 378 to 426 per tonne. I think as I understand from once you implement the initiatives and then later on you mentioned 430 to 480 for a medium-term guidance. I was just wondering how do you reconcile those two pieces of guidance, those two cost levels? Thanks.

Yep. No worries. So the first one, the lower guidance, is during the operating periods of the LAMA after the operating mode review. And obviously through the non-operating periods, we have a monthly fixed cost of around $4 million US a month. The second guidance is the longer term cost guidance that we previously issued at 20,000 tons a month in non-campaign operating mode.

Right, okay, that makes sense. And then a second question just on the merchant anode potential and possibilities there. You mentioned that these could be integrated purchases or I was just wondering are they purely integrated in terms of just anode and upstream and downstream or Is there also battery makers that are involved in making the complete battery for LIBs involved as well?

These new facilities are largely independent of upstream mine supply and independent of the battery manufacturer, although in some cases they may well be supported by particular battery manufacturing commercial arrangements or participation. The development of these projects has really sprung up because of the current dependence of the entire global supply chain on China and a number of projects have seen the opportunity to develop independent processing capacity outside of China and therefore need ex-China upstream supply and obviously at the moment from an operating perspective we are the only major supplier who can supply into those third party merchant facilities.

Right. And in terms of a timeline to say, you know, finalise a type of agreement, have you got any sort of expectation of when that could be?

Yeah, it really depends on the timelines for development of those projects. So there are two that will come into early operation, plan to come into early operation in 2024. So we have commercial arrangements for supply of material from Bulama with two in place already. We have another one underway at the moment. More capacity is scheduled to come to market from 2025 onwards. And those... Those later facilities were in the process of working with the project on some off-take arrangements, but it's earlier stage with those.

Okay, great.

Thanks.

Thank you. There are no further questions at this time. I'll now hand back to Mr Verner for closing remarks.

Thank you very much. We appreciate the participation in the call this morning. We recognise it's a challenging period for the company, but we look ahead to this half with a focus on potential catalysts ahead, and the team is working extremely hard on bringing those to realisation. Thank you for your attention today.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.