The Motley Fool

Top broker thinks this ASX mining stock a takeover target

The embattled Syrah Resources Ltd (ASX: SYR) share price is making a comeback this morning and it may be something to do with speculation that the graphite miner could become the next takeover target in the sector.

The Syrah share price jumped 5.6% to 56 cents compared with the more modest 0.5% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index at the time of writing.

The outperformance of the SYR share price also stands in contrast to other miners that are lagging the market. The Independence Group NL (ASX: IGO) share price is down 0.5%, the Lynas Corporation Ltd (ASX: LYC) share price is 0.6% lower at $2.58 while the BHP Group Ltd (ASX: BHP) share price has only managed to inch up 0.1% to $36.97.

Rising supply meets weak demand

Having said that, none of them have taking the same beating as Syrah with the stock crashing by over 80% this calendar year on a weak outlook for graphite and a recent profit downgrade.

The miner had lowered its 2019 production forecast by more than 30% to 152,000 tonnes as the price of the commodity came under pressure from increasing Chinese and Madagascan supply and flailing demand growth.

These headwinds have made Syrah one of the most popular ASX stocks to short-sell with the proportion of its shares being shorted standing at 14.5%, according to the latest ASIC data.

Short-sellers borrow stock to sell on market in the hope of buying it back at a lower price later to profit from the difference.

A rush to close these bearish bets can trigger what is known as a “short-squeeze” where the stock surges as short-sellers scramble to buy the stock to close their positions.

Too cheap to resist?

Credit Suisse may be giving some of these bears something to think about as the broker thinks Syrah is compellingly cheap despite the weak nearer-term outlook for graphite, which is used in electric vehicles (EVs).

The growth story for EVs remain in-check and the big crash in Syrah’s market value could attract a bidder looking for a strategic graphite resource outside of China, according to Credit Suisse.

While it’s never a good idea for most investors to buy a stock on corporate appeal, the broker believes the fundamentals for Syrah also look attractive.

“We have conducted a stressed scenario of a sustained 15kt/quarter sales at US$375/t ex. management cash preservation intervention. This scenario appears excessively punitive but demonstrates ample liquidity through mid-CY20,” said Credit Suisse.

“Short term market weakness aside, the investment thesis of increasing automotive electrification reliant on lithium-ion battery technology for which graphite is a critical component is unchanged. Syrah’s market capitalisation < US$150mn is now below Balama’s US$215mn development cost.”

Credit Suisse has an “outperform” recommendation on Syrah with a price target of $2.30 a share.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. Connect with him on Twitter @brenlau.

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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