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The Syrah Resources Ltd (ASX:SYR) share price falls 7% on guidance downgrade

Graphite miner Syrah Resources Ltd (ASX: SYR) was one of the worst performers on the local market in Monday morning’s trade, down 7% to $2.90. Production increased in the second quarter of 2018, but not enough to remain on track to meet the company’s full-year guidance.

Syrah’s share price had a 52-week high at  $4.95 in January, as the company was expected to make a bold entry in the resources sector as a leading provider of graphite, a key input in the production of lithium-ion batteries used to power electric vehicles.

Syrah started operations at its Balama project in Mozambique at the beginning of 2018, with an annual output forecast of 160,000 tonnes. After a subdued first quarter, the stock price plummeted and Syrah figured regularly as one of the most shorted shares on the ASX.

Production grew by 90% to 21,000 tonnes in the June 2018 quarter, and this figure is expected to increase significantly in the next six months. However, today Syrah announced a more prudent goal for 2018 production, in the range of 135,000 tonnes to 145,000 tonnes, with costs of between US$430 and US$450 per tonne, instead of the previously forecasted US$400 per tonne.

As volumes increase and unit costs decline, Balama should start generating a positive operating cash flow by the end of 2018, a few months later than expected.

Sales will be another crucial element for Syrah’s success. At the moment, the company has managed to sell only 72% of its production, at a lower price than inferred by external price reporters.

Foolish takeaway

Syrah has just started production, and despite some initial headwinds, it’s too soon to label Balama as an unprofitable operation. However, these results were quite disappointing and confirmed the intuition of short-sellers.

This should serve as a reminder that exposure to one of the new market trends – in this case, lithium batteries – is not a guarantee of immediate capital gains. But the market has plenty of opportunities to invest in growth stocks, such as these three.

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Motley Fool contributor Tommaso Autorino 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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