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Why the Syrah Resources share price crashed to a multi-year low today

The Syrah Resources Ltd (ASX: SYR) share price has been amongst the worst performers on the market on Monday.

In afternoon trade the graphite miner’s shares are down 8% to a multi-year low of 40.5 cents.

Why is the Syrah share price sinking lower again today?

Investors have been hitting the sell button after the release of an operational update late on Friday afternoon.    

Following a strategic reduction in production in September, Syrah reported graphite production of 45kt in the third quarter. This brought its year to date production to 137kt at a C1 operating cash cost of US$577 per tonne.

Syrah commanded a price of US$391 per tonne during the quarter, which dragged its year to date average selling price to US441 per tonne.

What’s next?

As you might have noticed above, year to date it has cost Syrah US$577 per tonne to produce its graphite and it has received an average of only US441 per tonne from buyers. This means it is losing US$136 per tonne, which clearly is not sustainable.

In light of this, Syrah has announced plans to make a significant cut to its production in FY 2020.

It is now targeting 120kt to 150kt. The low end of the range is more than half its original production target for FY 2019 of 250kt.

It is also aiming to cut its Balama C1 operating cash costs by ~20% to 25% from its year to date average. This will be through an immediate head count reduction, contract renegotiations, and mining and processing reconfigurations.

Whilst this is a positive, its operation will still be making a loss unless there is a rebound in graphite prices.

Based on its average for the year of US$577 per tonne, a 25% reduction will bring its cash costs down to ~US$433 per tonne. This is still US$42 per tonne higher than the average sale price of US$391 per tonne in the third quarter.

As a result, I would suggest investors stay clear of its shares until graphite prices reach an inflection point and its operation is profitable again.

Until then, I would gain exposure to the resources sector through world class miners such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) instead.

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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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