In morning trade the Syrah Resources Ltd (ASX: SYR) share price has crashed to an all-time low following the release of a market and operational update.
At the time of writing the Syrah share price is down a massive 41% to 41.5 cents.
What was in the update?
According to the release, Syrah has witnessed a sudden and material decrease in spot natural flake graphite prices in China recently. This has impacted price negotiations and contract renewals, with potential for further weakening of prices into the fourth quarter of 2019.
In response to this, Syrah intends to cut its production materially in the fourth quarter to just ~5kt per month. This equates to 60kt on annualised basis, compared to its calendar year target of 200kt to 245kt.
The reduced volumes will allow the company to focus on further increasing fixed carbon grade and product quality to develop value in use differentiation.
Management also advised that it will perform an immediate review of further structural cost reductions at the Balama Graphite Operation and across the company. After which, it will conduct a strategic and operational review for 2020. The details of this will be provided with Syrah's third quarter update which is scheduled to be released on October 22.
Speaking of which, at this stage, management expects its third quarter production and sales volume to be approximately 45kt with a weighted average price received of ~US$400 a tonne, down from US$457 a tonne in the second quarter.
If the company's C1 operating cash cost of production is the same as it was in the first half (US$567 a tonne), then Syrah will be making a sizeable loss on each tonne it produces.
The company's managing director and CEO, Shaun Verner, said, "In response to the sudden and material decrease in spot graphite prices impacting price negotiations and contract renewals, we have taken immediate action to reduce our production volumes in Q4 2019 to levels sufficient to maintain operations and continue our production optimisation activities. During this period, we will focus on further increases to product grade and consistency to drive our product differentiation. Although a difficult decision, we believe that this action is in the best interests of shareholders to preserve long term value."
AustralianSuper may now be regretting its decision to sink $55.8 million into Syrah during its entitlement offer in June.
Should you invest?
As tempting as it might be to snap up shares after such a heavy decline, I would suggest investors stay well clear of Syrah and fellow battery material shares such as Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS) until there has been a significant improvement in trading conditions.
Until then, I suspect their shares will remain under pressure and could still trade lower if prices weaken further.
