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Why the Syrah Resources Ltd share price has sunk 6% lower today

In morning trade the Syrah Resources Ltd (ASX: SYR) share price has been amongst the worst performers with a 6% decline to $3.17.

This means the graphite producer’s shares have now lost 32% of their value since the start of the year, much to the delight of short sellers.

Syrah Resources has been the most shorted share on the Australian share market for many months.

Why are its shares sinking lower today?

While Syrah often gets sold down when the lithium miners fall, as they have today, an announcement out of the company this morning is likely to have been the biggest catalyst for today’s decline.

According to the release, an issue has arisen at its Balama graphite project in Mozambique.

The issue relates to the dryer of the fines graphite circuit which has caused damage to the fines dryer refractory bricks and the flame tube.

The company is investigating the cause of the issue and estimates that repairs will take 8 weeks. Although the cost of the repair is not expected to be material, production will be reduced to approximately 65% of the planned volume during the period.

Should you buy the dip?

Whilst this is a disappointment and possibly indicates that there is a design flaw in its production facilities, I don’t think this production decline is necessarily a game-changer.

However, having said, that I’m not a buyer of its shares at the moment due partly to the high levels of short interest. At the last count, Syrah had 21.7% of its shares held short according to data provided by ASIC.

This appears to be related to concerns over the prices that the company is commanding for its graphite. Until I have seen evidence that Syrah is able to command prices that justify its market capitalisation, I’m going to sit this one out.

Instead, I see more value in lithium miners such as Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE). Though like Syrah, they are both high risk investments.

Alternatively, investors could skip the lithium miners and buy these hot tech shares which have huge potential.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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