Syrah Resources Limited

Thank you for standing by and welcome to the CIRA Resources Q3 quarterly report update. 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 for joining the call. With me this morning, Stephen Wells, our Chief Financial Officer, and Viren Heera, our General Manager of Business Development and Investor Relations. We'll reference some of the slides released along with the report on today's call. The third quarter of 2024 saw both continuing EV industry growth and significant uncertainties evident in the global lithium-ion battery, active anode material and graphite market. with Chinese dominance of sales growth and EV penetration, but varied growth rates in other markets. China's dominant position in lithium-ion battery and anode production continues to extend. The global markets for these finished goods and input materials are in the midst of a series of high-impact policy decisions across China, the US, and Europe in particular, as well as other growing jurisdictions. and many of these policy decisions potentially have binary outcomes. In light of this volatility, and despite our challenging operating and cash flow position, Syrah's strategy is to ensure production readiness and development progress beyond others in the ex-China integrated natural graphite anode material and input feedstock production. But this strategy must be supported by cost minimisation and cash preservation, protecting the asset base and ensuring we're set to take advantage of market and policy conditions as they evolve. Turning to slide five, during the third quarter, we were focused on sales from inventory for Balama with no production campaign being run. Progression of the DFC funding through a delayed and significant set of approvals that has now reached binding conclusions. increasing production expertise and progressing qualification towards sales of Vidalia anode material to Tesla and other customers, and significant government engagement regarding policy settings, particularly for the US, but also with regard to Mozambique and China. Whilst the natural graphite finds market is showing the first signs in many months of slightly more activity, the challenges have remained. and cash outflow has continued with both Valama and Bedelia impacted by the timing of demand, albeit for very different reasons. We'll outline these asset positions today, but we maintain that despite the very real challenges faced by the company, Syra demonstrates industry criticality through relationships with the US government and major OEM and battery customers, and only Syra is currently poised to benefit from any near-term catalyst. starting with the DFC loan, which Steve will comment on further later. The unexpectedly long process for approvals under the DFC loan took the major outstanding step towards finalisation last week, with approval required from the Mozambique Council of Ministers being granted after many months of communication, and the loan is now binding with disbursement processes to follow. The execution of this loan shores up SARA's runway significantly providing an important Belama working capital backstop, even if the most challenging market conditions from China continue, as it provides a bridge to ex-China natural graphite demand growth. Progress of the loan has been a significant effort over more than three years from Steve and the broader SARA finance team, the DFC team, and various service providers. It's an important indicator that both the DFC and the US Department of Energy have strategically embedded into CSIRA's funding, highlighting the importance of both Bulama and Vidalia to the graphite critical minerals position of the US and other ex-China markets. With $150 million US available under the 13-year loan and an initial disbursement imminent for Bulama and for upstreaming to provide parent company liquidity, this loan is critical for CSIRA's immediate funding position. The binding commitment is a great milestone and our focus turns to efficient disbursement processes that are important to our unrestricted liquidity position. We continue to work through these processes with all stakeholders, noting that some challenges have been seen through the post-election interruptions to normal availability in Mozambique. We're working hard with our US funding partners at both the DOE and DFC. as current geopolitical, market and policy circumstances are not simple to navigate, and in some cases impacts are driven by competing aspects of US policy. Getting to this point with funding has required strong communication, a degree of flexibility, and the policy and market conditions have evolved. We're very focused on reaching a more stable period ahead where these loans are operating procedurally. I wanted to touch now on the broader industry context. Both equity performance and commodity price performance of the majority of battery materials has been volatile for most of calendar year 2024. In nearly all cases, that volatility has been driven by the actions of or reactions to China, with siren and graphite no exceptions. Whether an EV and battery producer or an input materials producer, what remains critical to long-term equity value is the market position that your organisation holds relative to Chinese players at the same point in the supply chain. Case of and position in market development, competitive leverage and industry consolidation dynamics are all being driven by Chinese policy and market activity. and the responses of the US and the EU to those dynamics. China continues to dominate this EV and energy storage supply chain, and as we show on slide 8 of the presentation, in the immediate term, North American EV sales growth has slowed through 2024, and some of the forecast EV demand has been moderated, with planned auto and battery capacity expansion timelines in some cases also being adjusted, which has ultimately flowed through to our node materials. What remains critical strategically and in preparation for the future of input material production is asset quality, expertise and development readiness. You can't participate in the market developments or consolidation opportunities without operating progress and funding certainty. An attractive cost position and demonstrated product quality through qualification are also key differentiators. Palarma remains the premier asset in natural graphite globally, and a very strong operating team manages to drive campaign production volumes of high-quality material within the extremely challenging market conditions. Equally, at Vidalia, whilst progress has been slower than we hoped towards sales qualification, the learnings in production and qualification processes ex-China are enormous, and we're banking important development and operating experience in advance of other projects. We recognise that the investment and patience required from shareholders has been very significant and that the value we describe here is not yet reflected in the share price, but our focus on preservation of asset optionality and readiness is paramount to realisation of that future value. Turning to slide nine and linking back to the comment I made earlier about just how many potentially binary market and policy factors exist in the graphite and anode space today, SARA's position of readiness remains unique. With so many factors having turned against ex-China capacity development over the past two years, any swing back to a requirement for ex-China natural graphite feedstock or US domestic natural graphite anode material positions the company strongly. Upside risk is evident in a number of potential changes, such as China's supply risk, given the potential use of government export licence controls, Chinese domestic policy development, including potential economically driven consolidation or policy driven rationalization of overcapacity. Potential environmental controls focused on emissions or power consumption in China. More requirements for import approvals or costs on such. In the US, the evolution of import controls on tax credits and supply chain resilience. Ongoing changes to global tariff policies and overall trade policy positioning in the US dependent on electoral outcomes. With all this in mind, despite it requiring a significant cash investment and focus on further reducing costs, we're convinced of the importance of maintaining operating capability. Evidence of the expected growth in ex-China funds demand from 2025 onward will support Balama and the need for domestic production of natural graphite anode material in the U.S. sustains the importance of the Vidalia position. I'll come back to more detail on the assets in our markets later, but first I'll hand over to Steve to talk through the finance and funding position and an update on some of the relevant government policy positions. Steve?

Thank you, Sean, and good morning, everyone. Turning first to our cash position, as of 30 September, Syrah had total cash of US$61 million including US$41 million of restricted cash, which is SARA cash held for use by the Vidalia asset for operating costs, minor capital improvements, as well as standard lender protection reserves, and it's restricted under the DOE loan. The remaining US$20 million in unrestricted cash accounts that are used for the LAMA, corporate expenses and any additional group requirements. Clearly, as the DFC loan is finalised, that loan will reduce any cash draw from Balaama for an extended period as it relates to unrestricted cash. The reduction of $20 million from unrestricted cash through the quarter included $7 million to Vidalia for additional capital works to support qualification processes and debt service. We don't expect further capital requirements of this type for Vidalia going forward. Corporate and related experiences were $4.5 million with $1.3 million of legal expenses relating to the finalization of the DFC loan. The remaining $8.5 million related to BALAMA net cash outflows with reduced operations to minimize cash outflow offset by sales receipts. In conjunction with this quarterly release, we are also very pleased to announce today the signing of binding loan documents with the DFC. This is a very significant milestone as the loan will support the net cash outflow from BALAMA for a challenging market period in the near term, as well as provide liquidity support for the parent company through a contribution to the parent company. As Sean outlined, it has been a challenging process requiring a series of approvals, which have all taken longer than expected. However, signing of the finance agreement and related documents has been achieved and we are now targeting funding of the loan as soon as possible. Turning to slide 10 on US government policy in particular, The geopolitical backdrop to the evolution of ex-China AAM market conditions continues to be mixed and variable, with changing dynamics across both China and US government policy in particular. Although the implementation of the two-year transition rule in May 2024 allowed US auto OEMs a longer period to access tax credits while still utilising Chinese-sourced graphite nano, it did incorporate a mechanism for OEMs to be required to demonstrate support for the development of anode production facilities in the US. Final determinations on whether OEMs have been successful in demonstrating the required support and supply from non-FEOC AIM producers to be ready for 2020. In our view, OEMs and the regulators continue to walk a thin line with vehicles remaining eligible for the very significant consumer tax credits under the 30D program and the steps they need to take to have alternative supply in place. Given the abundance of cheaper Chinese anode material in the US and with a historically ineffective terrorist regime in place, it is clear that absent OEMs being required to support the domestic anode supply chain as a result of the implementation of the transition rule or other policy changes, development of the US anode supply chain will stagnate rather than progress. While policy progress under the current administration is occurring and the policy intent is clear, i.e. the development of a US anode capability, The absence of any further uptakes being announced and no meaningful purchase volumes in place for domestically available material compared to cheaper Chinese material mean that support for the build-out of the domestic supply chain is not certain by any stretch. On that basis, future tax credits for OEMs should be at risk if there is a substantial build-out of anode production capacity in the US. There is especially challenging from a relativity perspective in a world where almost $3 billion of consumer tax credits on EVs are expected to be claimed in 2024 by US OEMs significantly above initial US Treasury estimates. The more recent developments have trended towards advantage for Syrah and positively the reapplication of existing tariffs of 25% on imported Chinese natural graphite and artificial graphite AEM being in effect from June 24 was very welcome news for the competitiveness of domestically produced material against the subsidised Chinese imports. But statistics currently demonstrate lower coverage against imported goods that would be expected given the volumes being consumed. We expect that this will be an area of strong interest for customs and commerce authorities in the coming year. Final guidance on the 45X production tax credits have been released and including the cost of the import raw materials, even if those are mined outside North America. They are claimable if non-FEOC, which estimate will provide around $0.70 per kilo benefit to the Vidalia AAM cost base. And the next round of 48C capital tax credits are also underway, with Auto OEM seeking to demonstrate support for future capacity in that process. Zara is cognizant that much uncertainty is riding on the outcome of the upcoming US elections. Whatever the outcome, we expect that the greater activity will be evident in the sector after the completion of the election, irrespective of administration. There remains great opportunity for the US to further refine policy to accelerate domestic AIM production and sales, especially where capacity has already been built or there are options for expansion. If the government is truly dedicated to seeing the build-out of the domestic production capacity for battery materials, policy must drive support from OEMs to reduce their reliance on and benefit from aggressively dominant and subsidized Chinese production. As Sean noted earlier, across many markets, including but not limited to graphite, this capacity domination is driving unsustainably low pricing, in many cases below the cost of production, with the aim of China driving out ex-China competition and monopolizing the markets. For investors in and observers of Syrah, there are many catalyst developments to watch for in this space. And I'll now pass you back to Sean.

Thanks, Steve. Moving to Bulama, where we are not currently in production mode given campaign operations. Ansara did not produce in Q3, sales coming from accumulated inventory. Operational focus in the quarter was on maintenance activities and ongoing readiness and process development. Post-quarter end, we've been dealing with a community protest action which is impacting our ability to freely access site and inhibiting scheduling of our next production campaigns. This action, caused by a small number of landholders, is nominally related to dissatisfaction with resettlement land and compensation received prior to the commencement of the Palama operation. Over the course of development of the mine, processing facility and support infrastructure, around 800 small farms or mashambas but no homes were resettled through a detailed joint government and company process. The commencement of the protest several weeks ago coincided with the Mozambique national elections, and the instigators appeared to have conflated other issues and taken advantage of the authority's focus on other challenges surrounding the election. Importantly, historical audits and third-party independent reviews of our resettlement practices through various accreditation processes, including consultants for funding and as part of our EIRMA audits, have seen sight as positive and responsible developer and operator. And a recent resettlement audit from a provincial government appointed committee demonstrated the company has complied with all legislative requirements. Whilst the protest actions which impede access are illegal and are acknowledged as such by the authorities, we've been patient and are working through the relevant legal and government channels towards resolution. The company is absolutely committed to resolution aligned with both the legal framework under the Balama Mining Agreement and to utilising the processes available to us to ensure a long-term aligned solution. Should any deficiency be demonstrated in either the resettlement process or outcome, the company remains very open to dialogue and rectification through the appropriate mechanisms. Whilst this issue is being resolved, we've demobilised operating staff and are working with the relevant authorities on returning to normal conditions. During Q3, the Bulama team dealt with the first significant lost time injury at the operation in almost six years. As a team, safety is critical to our identity and approach. And given the campaign operating mode, we've been very focused on risks around concentration and commitment to process discipline when operating intermittently. The incident, which occurred during a response to a minor scrub fire outside solar array, led to an employee suffering a permanent impairment injury. The company has ensured high quality care for the individual and support for his family and will be seeking to ensure that he can return to full employment in future. The learnings from the incident investigation are currently being finalised. Our ESG position and reporting transparency are critical to the company. We've maintained strong community support and have a broad set of development initiatives including health, education and training, sustainable income generation, infrastructure and other community building programs. In Mozambique, for Balama, we've been recognised in-country as award-winning on this front. In the US at Vidalia, our efforts have been focused on education and skill acquisition as well as employment opportunity in what's a historically economically disadvantaged area. Across a range of sustainability parameters, as well as mining assurance, tailing storage, audited greenhouse gas emissions intensity and human rights and modern slavery analysis, SARA is fully committed to reporting and continuous improvement, fundamentally differentiating our position from China's incumbent producers that dominate the natural graphite and anode material industries. Our quarterly sustainability report released on our website today, along with this update, emphasises the importance and magnitude of this effort. Another key focus at Bulama during Q3 was readying TSF Cell 2 for first tailings deposition concurrent with SARA's ongoing progress towards the ITMM system compliance, the industry's revised and improved standards for tailing storage, facility operation, compliance and monitoring. Deposition into Cell 2A will commence from the next production campaign. Turning to Bedelia, Syrah has made excellent progress in product testing toward qualification for anode material from Bedelia, with multiple customers passing the product through various stage exits of their qualification processes. Most importantly, Tesla continues to progress the material through qualification towards purchasing in 2025. Syrah's own testing of product is showing strong performance in cell testing results, from concurrent samples of those dispatched to customers. Some performance data is provided on slide 19, exhibiting purity, particle size, distribution and surface area, as well as first cycle efficiency and discharge capacity. Cycle life analysis also continues, and customer feedback so far demonstrates that performance there has been at or better than reference material. Operating capacity utilisation at Bedelia was low through Q3 with no near-term demand as we await qualification progress and therefore no need for inventory build. The Bedelia team has focused on activity to ensure that learnings from operations are implemented and embedded to drive operating efficiency and reliability, particularly in the milling and purification areas. Furnaces 3 and 4 have now also been ramped up with the team ready to push operating rates as qualification progresses. We've also allocated some capital to minor optimisation opportunities identified in initial operations and customer interactions. In the time that's been made available to us, we continue to work on additional product specifications for various customers beyond our standard CLP18 or coated bleach purified 18 micron product. These further specifications are focused on customer targets related to their blends, or particular battery performance parameters. Review of operating costs for production so far has seen initial guidance moving into calendar year 2025 increased due to power, labor, and maintenance. The 18% increase in office to $4.31 a kilogram is likely to be more than offset by production tax credits from the 45X program, but the team also focused on efficiencies and opportunities to improve costs as more operating experience and greater capacity utilisation is achieved. Lastly, on Vidalia, we continue to progress three key offtakes with deliveries proposed within the next several years. Disappointingly, a significant contract, which was at the stage of finalisation last quarter, did not progress through Q3, and we believe that a number of offtakers are awaiting policy evolution around 30D tax credit implementation requirements, and potentially the election outcomes before progressing. Regardless of the election outcome, domestic production of anode material will be important, and once greater certainty on the policy settings is evident, we expect further offtakes to be confirmed, both for the remaining Phase 2 tonnage and underpinning further development towards a 45,000 tonne capacity Phase 3 development. We do note strategically the progress of phase three is fully dependent on that offtake progression and funding, as well as demonstration of sales from the existing phase two facility. With our major focus being in the US, we have discontinued discussions with Tees Valley Graphite regarding the establishment of a joint venture for a potential anode facility in the UK. Moving finally to the market and commercial outlook on slides 6, 7 and 8, the natural graphite and anode material markets continue to demonstrate markedly different China and ex-China developments through the quarter. Global EV sales increased and were up 17% year on year in the quarter with very strong growth in China. The US sales outlook has been challenging through the year and demand for natural graphite imports is expected to strengthen in 2025. Europe has been disappointing so far this year with sales growth in China remaining the dominant force overall in global EV and battery growth. Accordingly, whilst anode material production in China continues to grow strongly, it's been heavily weighted towards artificial graphite anode material satisfying domestic demand in China. Natural graphite finds prices in China remain at historical lows from Q3, with net China trade remaining low. Binds demand was again minimal, given the domestic anode material market being largely satisfied by artificial graphite anode material and natural graphite anode material demand for export, utilising domestically produced feedstock. The previous two to three years of artificial graphite capacity expansion, sub-economic pricing and subsidisation of development in China is, however, starting to see the consequences of unconstrained growth. As we've anticipated through recent quarters, margin compression and financial distress is becoming evident in the Chinese domestic anode material market. Public reporting shows eroding margins and two of the top five producers are understood to have serious issues, one with debt coverage and another not having operated for more than six months to draw down inventory and manage costs. Ongoing rationalisation in China, both financially and by policy, is key to recovery in the natural graphite anode market. Post-quarter end, two somewhat encouraging factors off a very low base were that a slight increase in natural graphite demand has been evident through October, and almost all domestic Chinese natural graphite mines are understood to have gone into winter shutdown early due to lack of profitability. Natural graphite spherical and feedstock inventory levels are therefore relatively low, and any increase in demand would potentially see some tightness in these markets. Horse flake natural graphite sales demand and prices remain strong, with supply limited by the number of operations currently unprofitable, lower Chinese domestic production and issues with recent new supply developments. New Indonesian demand for fines is expected from early 2025. But without improvement in the Chinese domestic mines market, expectations are for a single Balama production campaign in this current quarter. In Q4, we're focused on driving sales across all natural graphite market segments and on advancing three key offtake arrangements and sales qualification for Vidalia. Although progress to support increased sales and greater capacity utilisation of our assets has been frustratingly sloped, We believe we're making much more significant progress in real integrated production availability and product quality than any other ex-China player. And this will ultimately bear fruit as we utilise available funding to position for that recovery and growth. I wanted to conclude by thanking the CSIRO team for helping to navigate this very difficult period. Many of our team are shareholders. and are absolutely aligned with the target of near and long-term shareholder value generation and achieving the extraordinary challenge of delivering independent ex-China upstream and downstream participation in this anode market. We will continue to forge toward the objective of increased sales and production to achieve positive operational cash flow and a platform for future growth. And with that, we'll 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 Mark Fischera from Foster Stockbroking. Please go ahead.

Yes, congratulations, Sean, on getting the DFC loan binding. Just a couple of questions from me. Firstly, Just with the BTR, you had expectations previously of doing a second shipment in the second half of this calendar year, similar to the one you did in the first half. I was just wondering, is that expectation still there for this half, or is that sort of moving towards 2025?

Thanks, Mark. Yeah, hard to say at the moment around the ramp-up of that facility. We know that the official opening process was held a couple of months ago and we remain engaged with VTR around the timing of potential demand. But unknown as yet as to whether there will be additional sales this year or into 2025.

Right. And... And just with that mention of that potential US customer that you were close to executing an agreement but it didn't go through, was that purely due to the customer wanting to wait to see the outcome of the election or any regulatory changes or was there something to do with the qualification process or agreeing on pricing, etc.? If you could elaborate a bit on that, thanks.

As we've said and repeated in the report today, we had finalised commercial negotiations and nothing standing in the way from a qualification perspective. I don't want to speak specifically around that. There is definitely a degree of hesitation from a number of customers in the uncertain policy environment. particularly around the requirements needed to demonstrate eligibility for the 30D tax credits and what needs to be done to be showing support or have plans in place for supply of material by 2027. And it's our sense as well that there's a degree of concern around awaiting the election results and seeing what transpires with policy. So that's probably where I'd leave that question.

No worries. Thanks, Sean. That's it for me. Thanks, Mark.

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. We'll now pause a moment to allow for any final questions to register. Thank you. We have a question from Andrew Harrington from Petra Capital. Please go ahead.

G'day, Sean. Thanks for your time and the opportunity to ask questions. With that off-taker that did not progress, does that mean that it's on pause or they just said, look, we've qualified the product and we've agreed documentation, but we've just changed our minds?

I've made the comment I can make around that, Andrew. I think that the qualification process amongst a number of customers is not complete. It continues and has quite a long series of requirements. And I've made the comment that commercial arrangements were pretty much finalised on that front. And I've made comment, I guess, around policy settings, et cetera, that may be influencing that position. So that's all I can say on that situation.

Okay, no problem. And in terms of the sales that took place in the quarter, your average realized price was quite good relative to what we're seeing in the quarter. spot price for fines, can you provide more colour as to where that material was going and how you achieved such a good price?

Yeah, the bulk of material was sold outside China and certainly coarse flake prices and the proportion of coarse flake support that weighted average price that was achieved. and the majority of that product was going into various industrial markets. The inhibiting factor for greater demand at the moment clearly is the natural graphite finds demand into the anode material and battery industry and the proportion of finds that we produce at Balama is 80 plus percent and therefore it's demand for that material which is driving our production campaign planning. We seek to continue to take as much advantage as we can of the course like prices and scarcity in those markets at the moment. But ultimately, funds demand will drive our production planning.

Understood. And you said you're going to do one campaign in this December quarter. Is that approximately 10,000 tonnes?

The campaign targets historically have been around 20,000 tonnes, but we'll see how that evolves. That looks to be the logical plan at this point based on demand in front of us. We'll see how that evolves.

Okay. Thank you. That's it from me.

Thanks, Andrew.

Thank you. Once again, if you wish to ask a question, please press star 1. Your next question comes from Ben Lyons from Jarden. Please go ahead. Pardon me, Ben. Your line is now live. Thank you. There are no further questions at this time. I'll now hand back to Mr. Verner for closing remarks.

Thanks very much for everyone's attendance on what's a busy day and we look forward to keeping people updated around market conditions evolving and we'll obviously provide further updates around production, sales and progression of the TFC loans as we move along. Thanks for your attendance.

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