Five years in the making: CEO Shaun Verner says Tesla deal proves Syrah strategy

Syrah Resources (ASX:SYR) caught the market’s attention this morning with a four year supply deal with Tesla, a mild-mannered manufacturer of electric vehicles and inflammatory tweets.

Shares in the company jumped by 23% in morning trade before going into a trading halt, following an information request from the ASX.

Syrah Tesla

The devil – and this is not an underhand reference to Tesla’s CEO Elon Musk – is in the detail and the detail at this stage is pretty thin.

In an update to the ASX this morning, Syrah says it has come to terms with Tesla to supply a stackload of natural graphite Active Anode Material (AAM) from its US production facility in Vidalia.

The company says Tesla will offtake the majority of the proposed initial expansion of AAM production capacity at Vidalia at a fixed price for an initial (and not insignificant) term of four years.

Tesla also has an option to offtake additional volume from Vidalia, depending on exactly how much Syrah can expand its capacity beyond 10kt per annum of AAM.

“The agreement provides a compelling foundation to proceed with the initial expansion of Vidalia’s production capacity and Syrah plans to make a final investment decision for construction of this expanded facility in January 2022,” Syrah told the ASX.

Tesla – a pretty decent customer

Syrah also said it was advancing commercial and technical engagement with other target customers to develop Vidalia AAM for mass production, and to secure additional long-term purchase commitments.

Speaking with Stockhead, CEO Shaun Verner said customer underpinning was a key requirement for Syrah to take a final investment decision (FID) on Vidalia’s initial expansion of production capacity.

“This Tesla contract provides a strong basis for this,” Verner said. “It also provides a good foundation for external financing, which is required for the expansion.”

While the detailed terms of the offtake contract are confidential, for Verner and his team the announcement this morning represents more than just a landmark deal with a globally recognised name.

“For us, this is a key milestone in a five year strategy which everyone at Syrah has been patiently and persistently hunting down,” he said.

What happens next then, Shaun?

“We expect to take the FID to the Board in January 2022,” he said.

“This foundation customer commitment is a key requirement for that decision, as we’ve been saying all along.”

Following the decision, Verner puts an 18 month window on construction with commissioning of the expanded facility expected in H2 2023.

The Vidalia proposition

Vidalia’s proposition is looking mighty attractive when compared to the existing supply chain for anode materials.

Whether it’s in regards to ESG, going local or vertical reliability of an integrated operation – the increasing focus on developing local supply chains, battery and EV manufacturing for governments and customers – most particularly in the US – is placing Syrah way out in front.

Verner says battery manufacturing in the US is about to grow exponentially with the pace of new facility announcements increasing over the last 12 months.

“Just look at Toyota, Stellantis with LG/Samsung, SKI/Ford, LG/GM Ultium – Vidalia is the only advanced integrated natural graphite active anode material facility in the entire USA,” he said.

SYR – on a streak in Mozambique

Meantime, Syrah’s upstream Balama operation in Mozambique, is increasing production in-line with market conditions.

Graphite prices have crept steadily higher this year following shipping and supply chain hits, with Syrah restarting the Balama operation in February that it mothballed at the onset of the pandemic in 2020 amid flagging prices.

The natural graphite market in the short-term will be supported by Chinese supply disruption, Verner says.

“The long-term market backdrop is robust with natural graphite demand expected to increase 4x to 2030, underpinned by strong growth in end-markets such as a 5-6x increase in active anode material demand, as well as an increase in EV sales from 6m units p.a. today to >30m units p.a. in 2030.”

But, as Elon Musk just proved and as Stockhead’s Josh Chiat said earlier this week, it’s downstream where Syrah and companies like it are exciting the money men – positioning to ‘capture the natural uplift in revenue from moving up the value chain.’