Syrah Resources Ltd (ASX:SYR) downgrades production guidance

The Syrah Resources Ltd (ASX: SYR) share price will be one to watch on Tuesday after the graphite miner provided an update on production at its Balama graphite operation in Mozambique.

According to the release, although the company has been making progress on its ramp up and optimisation activities, there has been an issue with its flotation level sensors.

An inconsistent performance of the flotation level sensors has led to overall graphite recovery and production volumes being impacted. And while a small number of replacement flotation level sensors have been trialled, none have met expectations thus far.

As a result, management expects to fall short of its graphite concentrate production target for the first-half of FY 2018. Instead of the guidance of 40,000 tonnes, it expects to produce between 32,000 and 34,000 tonnes of graphite concentrate in the during the half.

Short sellers will no doubt be pleased with this development. Syrah Resources is the most shorted share on the Australian share market at present with approximately 20% of its shares held short at the last count.

However, management appears confident that it can overcome this latest setback. It advised that it has generated an alternative option for improving flotation cell level management using an engineering solution for the original sensors. Pleasingly, early indications point to improvements being achieved.

As such, it remains confident that a material improvement in flotation level sensor performance will mean that its full-year production target of 160,000 tonnes remains achievable.

Should you invest?

While I do think that the Balama project is a world class asset and could generate sizeable free cash flows over the long-term, I wouldn’t invest until things are up and running properly, prices for its produce are known, short interest falls, and the threat of terror attacks has diminished.

Until then I would prefer to gain exposure to the resources sector through relatively low risk mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Alternatively, this next investment boom could be better than all three shares.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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