Tirupati Graphite (LON: TGR) shares are down 15% today. TGR shares are down on the operating and trading update. Some of which is pretty good news, some something we thought would happen and the last part definitely not so good. The good news is that they’ve been able to increase production and also to sell that increased production. OK, that is good.
The part that we thought would happen is that the graphite market itself would be subdued. Yes, we know, everyone needs lots more graphite for batteries for the EV revolution. Natural graphite is preferred for technical reasons to synthetic. But as we’ve pointed out years back about Tirupati, and also about Northern Graphite, there’s very rarely an absolute shortage of a mineral. As demand rises more people go looking for ways to supply. Just given the size of the planet - and that it’s all made up of only those 90 elements - that means some to many will be able to supply. That means supply increases and therefore there’s pressure on pricing. As Tirupati says: “The price realised remained similar to H1 previous year in spite of subdued market prices during the current year period.” Yep, even with the EV revolution prices are subdued - that means supply is increasing along with demand.
Tirupati Graphite share price from Google Finance
As we can see there there was quite a bit of hope being built into that TGR share price ahead of the update. The reason it fell back is this line: “Average head grade across the two projects remains below 3% as against 4.5% used for plant design, average recovery remaining >80%. Owing to saprolite ore type, which does not allow ideal separation of inter and over burden in bulk mining operations, the Company considers it prudent to assume head grade to remain c.3% and reorient its future plans accordingly;” This means that future assumptions about output now need to be cut by 33%.
Now, it’s not true that all of the costs are in the move of ore from ground to concentrator. But a substantial part of them are. At least, some substantial portion of operating costs are and therefore gross margin which can pay for overhead, capital and so on. This doesn’t kill the project, certainly not, but it does make it less profitable not just now but off into the future. It’s simply less attractive now than it was before that 33% reduction in extraction from ore.
We’re not sure that 15% off the share price is enough to reflect that if we’re honest about it.
