Chinalco to seal Syrah Resources deal

China's state-owned Chinalco has put its foot on strategic new supplies of graphite that Syrah Resources plans to bring to world markets from a development of its huge Balama deposit in northern Mozambique.

In a deal expected to be confirmed in coming days, Chinalco is believed to have signed a memorandum with a Chinalco affiliate that is expected to lead to the signing of a binding offtake agreement.

In the deal more than a third of Balama's initial planned production of 220,000 tonnes of graphite would make its way to China, which is already the world's dominant producer of the carbon material.

Chinalco is best known locally for its 9.9 per cent stake in Rio Tinto, a legacy of its sharemarket raid on the company and failed asset deal in 2008, when Rio was warding off takeover overtures from BHP Billiton, as well as having to recapitalise itself in the wake of the global financial crisis and its ill-timed $US38 billion acquisition of Alcan. Rio eventually turned to its own shareholders for the recapitalisation.

Syrah's market value has rocketed since the former sleepy gold explorer took up exploration interests in Mozambique in 2011 when it was a $10 million company. Its shares have since jumped to $2.90 apiece, valuing the company -- which is 23 per cent-owned by its directors -- at more than $470m, all on the strength of its Balama discovery.

The company is planning a staged development of Balama, with first production from a $US92m development possible within 15 months. Securing offtake agreements for the planned production is considered critical given the global market is estimated at only 1.2 million tonnes annually, albeit with growth in new hi-tech markets of lithium-ion batteries, graphene, fuel cells and pebble-bed nuclear reactors.

Syrah has previously said that because of the size, quality and expected low-cost production of the Balama resource, it would also be looking for opportunities for its graphite to become a substitute in higher volume but lower value markets. It is assumed that this is what has attracted Chinalco to Balama.

Chinalco is the third-biggest aluminium producer in the world. Other forms of carbon -- petroleum coke and anthracite -- are used to make the anode blocks that conduct electricity in the aluminium smelting process. The global use of anode blocks in tonnage terms is a big multiple of the traditional uses of graphite, and it is presumed that Chinalco is looking to use graphite as a substitute for petroleum coke and other forms of carbon.

Apart from the aluminium connection, it has been reported that Chinese production of high-quality graphite is under pressure following the shutdown of the industry in Shandong after water supplies were contaminated by acid used by producers to upgrade lower-grade material.

Graphite is also used in the steel industry, with China the biggest in the world with production of more than 800 million tonnes annually. Balama has an inferred resource of 1.15 billion tonnes grading 10.2 per cent total graphite content, with higher grade portions.

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