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Why the Syrah Resources share price is in a trading halt

The market may be pushing higher on Friday, but the Syrah Resources Ltd (ASX: SYR) share price won’t be joining it after the graphite producer requested a trading halt.

Why is the Syrah share price in a trading halt?

According to the request, Syrah has requested the trading halt “pending an announcement by the Company to the market regarding natural graphite market conditions and operational response.”

It has requested that the trading halt remains in place until the earlier of commencement of normal trading on Tuesday September 10, or when the announcement regarding the stated purpose is released to the market.

What does this mean?

This certainly doesn’t look good for the embattled miner. Whilst I can only speculate at this stage, I suspect that natural graphite market conditions have continued to deteriorate and management has decided to put its Balama operation on care and maintenance.

Care and maintenance is a term used in the mining industry to describe a situation where production at an operation is stopped but the site is managed and maintained to ensure it remains in a safe and stable condition.

The reason I suspect that this will be the case is that in the June quarter the company recorded a weighted average graphite price achieved of US$457 per tonne. Yet its C1 operating cash cost of production for the half stood at US$567 per tonne, which meant the company was effectively losing US$110 for every tonne it was producing.

This certainly isn’t a good business model. And if graphite prices have continued to weaken since then, these losses could have widened during the September quarter.

By ceasing production the company will save money and also reduce the amount of supply in the market, which could potentially support higher prices down the line.

Overall, I think this is another sign that it could be best to stay away from battery materials shares such as Syrah, Galaxy Resources Limited (ASX: GXY), and Orocobre Limited (ASX: ORE) until there has been a notable improvement in market conditions.

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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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