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HOLD

Coverage Initiated
Updated
Price Initiated
Target
Sector
Industry
19/08/2021
25/10/2021
$0.305
$0.70
Materials
Diversified Metals & Mining

Profile

 

Core Lithium Ltd is an Australian exploration company focused on lithium, copper and mineral deposits exploration in South Australia and Northern Territory. Core Lithium is currently focuses on its flagship project - Finniss Lithium Project.

Summary

ASX-listed Core Lithium is well positioned to be Australia’s next lithium producer, developing one of Australia’s most capital-efficient and lowest-cost spodumene lithium projects; the Finniss Lithium Project, located near Darwin Port in the Northern Territory, Australia.

 

In 2021, Core Lithium released a Definitive Feasibility and Scoping Study on Finniss, the highlights of which included production of an average 173,000tpa of high-quality lithium concentrate at a C1 Opex of US$364/t and A$89m Capex through simple and efficient DMS (gravity) processing of some of Australia’s highest-grade lithium Mineral Resources, along with an initial 10 year mine life. Core Lithium began construction at Finniss in October 2021, with first production anticipated before the end of 2022. 

 

The Finniss Lithium Project has arguably the best supporting infrastructure and logistics chain to Asia of any Australian lithium project. The Finniss Lithium Project is within close proximity to power stations, gas and rail, and is 88km by sealed road to workforce accommodation in Darwin and importantly tis situated close to Darwin’s Port - Australia’s closest port to Asia. Core Lithium has already established binding offtake and is in the process of finalising further agreements within the lithium battery supply chain and electric vehicle industry.

Key Statistics

The company has an experienced and proven team of directors and management with excellent skills for driving value growth in the mining industry. They have worked together successfully both as a team and separately in a number of listed mining companies on the ASX.

Valuation and recommendation

 

Our recommendation for Core Lithium is a speculative HOLD. With the Finniss mine entering construction and larger reserves recently found, exploration risks have for the most part been mitigated. 

 

The geographical position of the company and its partial ownership by a major Chinese lithium refiner provide a great entry point into the Asian market as well as the global battery supply chain. The low cost of production, 10 years of reserves, and a mine payback of 2 years reduces development risks significantly. 

 

There is a strong political push toward transportation electrification in the EU, USA, and China, as well as large stimulus bills in the USA and Europe. This should put a relatively high floor to lithium prices, even if high volatility is to be expected. The quickly increasing competition in the electric vehicle market and the growing offer from more car brands like Ford, Audi, or Volkswagen should also be a positive trend, as it will convince more people to switch to electric cars. In the long term, electrification should stay a large investment topic, and the electrification of trucks, buses, and other vehicles should accelerate the trend already witnessed with cars. The same is true for utility-scale batteries, used to stabilise the electric grid from renewable energy fluctuations. 

 

In the very long term, a risk persists for new battery technology being less reliant on lithium - or even not at all - replacing the current domination of lithium-based batteries (for example, Iron-air batteries). But for the lifespan of the Finniss mine, lithium is likely to stay the focus of battery technologies. 

 

Another attractive factor for Core Lithium is its exploration portfolio. The company is focused on mining regions with good historical track records and is located in Australia, a Tier-1 jurisdiction. If gold, silver, uranium, or copper prices durably go up, Core Lithium’s exploration portfolio should deliver significant options. The company could either sell the projects or develop them further. 

 

Considering the continued push for low-carbon green technology and the increasing debt levels, permanently high demand for these metals is likely, providing a high price floor. 

Industry Outlook

Over the last 10 years, the lithium market has evolved from a minor commodity, mostly used for Li-Ion batteries of electronic devices, to a key component in the ongoing electrification of transportation. 

 

In 2008, lithium consumption by batteries was standing at 20,000 metric tons, a number that has exploded 5-fold since. This was mostly driven by the rise of electric cars and other vehicles like buses. Sales of electric vehicles increase from less than half a million cars in 2015 to 2.7 million cars in 2020. To put it into context, one Tesla Model S contains approximately 63 kg of pure lithium, the equivalent amount of hundreds of phones or computers.

 

Lithium is a very common element on Earth but is rarely present in a concentration that makes its extraction commercially viable. It is mostly extracted from brine (in salt flat deserts) or rocky deposits (called spodumene). While Chile and Argentina are mostly producing from brine, Australian deposits are mostly spodumene. Other lithium extraction techniques are currently being explored, including from clay deposits or from seawater (seawater contains a tremendous total amount of lithium, but is very diluted).

 

Lithium is mostly sold in the form of lithium carbonate, which went from a spike in price in 2018 to a brutal decline in the last 2 years. It looks like in 2021, lithium is following the upward trends of most commodities. This year the lithium price has so far been very unstable, with excess capacity being followed by excess demand from growing electric vehicle manufacturers back to excess production from mines expansion and new mine coming online. 

 

Lithium mining is not without risks, starting a new lithium mine takes at least 5 years, and future profitability is hard to predict amidst such volatile prices. To compound the problem, future demand is uncertain, with widely diverging opinions regarding the future speed of electric vehicle market penetration. Therefore, in the next decade, this cycle of quick boom-and-bust of lithium prices is likely to persist. 

 

For the industry, relationships with China remain important. Some Australian exporters to China have had a rough time the last 12 months, with quotas and restrictions from China limiting their access to its market. But Core Lithium appears to be well placed.

 

China is at the forefront of the electric vehicle revolution and has very ambitious goals. China already only uses electric buses for the whole of Shenzhen (the Chinese Silicon Valley). Largely, this move is to ensure China reduces its dependency on overseas oil imports. At present, China manufactures most of the lithium-ion batteries in the world, controlling the large majority of the supply chain, including the refining of metals to battery-grade quality. 

 

It should also be noted that while the Chinese government is looking recently to reduce the impact of rising commodities prices, partly by releasing strategic reserves and punishing speculation, these strategic reserves are not large enough to counter the increase in base metal demand in the long term. 

Company Outlook

China’s Sichuan Yahua Industrial Group, Core Lithium’s largest shareholder and a key supplier to Tesla plans to double lithium hydroxide output. Yahua plans to invest to increase the output of its Yaan plant from 20,000tpa to 50,000tpa of battery-grade lithium hydroxide. Yahua and Tesla signed an agreement in December 2020 for Tesla to purchase US$630 million to US$880 million of battery-grade lithium hydroxide over a five-year period. 

 

A significant portion of Yahua’s lithium concentrate supply requirements for Yaan can be met by Core Lithium. Core Lithium and Yahua have signed a binding offtake agreement for Core to supply 75,000tpa of lithium spodumene concentrate. The Yahua offtake represents approximately 40% of Finniss’ proposed 175,000tpa production. During the last reporting period, Core Lithium defined an additional Exploration Target of 9.8 to 16.2 million tonnes at a grade of between 0.8 to 1.4% Li2O across seven different prospects within the Finniss Project. This new ET is in addition to the Finniss Mineral Resource of 15Mt @ 1.3% Li2O.

 

Battery-grade lithium hydroxide produced from Finniss concentrate During the reporting period, Core Lithium announced that battery-grade lithium hydroxide monohydrate (LH) from spodumene mineral concentrate had been produced from the Finniss Project. In light of the success of this program and the recently granted Federal Government Major Projects Status and $6m Modern Manufacturing Initiative Grant, Core Lithium is now considering the obvious downstream value potential given the Project’s synergies with the adjacent Middle-Arm industrial infrastructure near Darwin. 

 

The production of battery grade LH has provided Core Lithium and its customers' confidence in the value of the Finniss Project, its importance to Australia’s northern regional economy, and strengthening Australia’s position further downstream in the global lithium battery supply chain. 

 

Lithium exploration breakthrough in the NT

 

The Finniss Gravity Survey was co-funded by the Northern Territory Government with survey data collected over a 500x500m and 500x1000m grid of gravity stations through the majority of Core’s Finniss Project tenements. The survey has identified a major NNE-trending gravity high and potential lithium pegmatite corridor that extends from the King Table Group in the north to the Leviathan Group in the south and includes the lithium-rich Observation Hill Group.

 

Pleasingly, there is no reason to believe that these known lithium pegmatite groups are unique clusters. Rather, it is more likely that the currently defined distribution of pegmatites identified to date in this belt is due to large tracts of prospective ground between Grants and Leviathan, which are covered by laterite or soil cover that have not been effectively explored yet. Core Lithium’s new gravity survey has demonstrated that the gravity methodology is a valuable tool for pegmatite exploration in the NT. The survey shows that the most important lithium-bearing pegmatites are largely constrained to the gravity highs, at the fertility “sweet spot” above its granite source, where it is believed the thermal gradient favours precipitation and preservation of lithium minerals.

 

Lithium resource expansion and exploration drilling has recommenced at the Finniss Project. Diamond core, reverse cycle (RC) and RAB drilling has been focused on resource expansion and converting a high proportion of the newly acquired prospective ground at the Finniss Project to a Mineral Resource. A relatively simple program of regular spaced RC drilling complemented by a proportion of diamond drilling to add further resource information is planned to bring these lithium-rich pegmatites into spodumene resources in the coming months. 

 

Gold exploration activity at the Bynoe Gold Project has also recommenced, with early-stage geological mapping and geochemical surveys underway ahead of gold discovery drilling programs in 2021, including follow-up drilling at the exciting Far East gold discovery. Greenhouse gas assessment of Finniss In late June, Core announced the formation of a partnership with global environmental and sustainability consultants ERM Group to provide a carbon footprint evaluation, Life Cycle Analysis and Sustainability Assessment of the Finniss Project. 

 

Core Lithium remains committed to investigating innovative approaches to further reducing its carbon footprint. For example, the Finniss Project site will undergo significant revegetation as part of the development and rehabilitation strategy. The company has undertaken a preliminary study on potential Pumped Hydropower Energy Storage for the first Open Pit Mine at the Finniss Project and Core is considering options related to renewable energy generation and utilisation of electric vehicles.

 

Following the impressive 2020 results at the Far East, exploration in 2021 has focussed on searching for along-strike extensions to the Far East gold mineralised system. This work has delineated other significant quartz vein systems to the SSW at the Toolebuc Prospect. As at the Far East, metal detecting has discovered coarse gold grains and gold nuggets confirming that the Toolebuc veins are mineralised. Core Lithium’s recent mapping and prospecting has materially increased the strike length of the broader target zone from the 1,600m of strike defined in 2020 to a total established strike length of 2,500m, as the Company now believes the Far East Gold Belt extends unbroken beneath the Quaternary black soil cover that separates Far East from Toolebuc. Additional quartz veins with oxide clots after sulphide continue to be found at Toolebuc, potentially also expanding the gold-related target zone's overall width.

Share Purchase Plan and Capital Raising

In September, Core completed a placement to sophisticated and institutional investors to raise $91 million. The company’s share purchase plan (SPP) was heavily over-subscribed, receiving in excess of $43 million on a target of $15 million. Due to the demand, Core elected to increase the amount raised from the share purchase plan to $25 million. The process from the SPP and Placement will be used for the development and construction of the Finniss Lithium Project, with the excess SPP funds being used to accelerate the assessment of potential acquisition and exploration opportunities, along with expanding resource drilling on high priority pegmatite targets and lithium projects.

Finniss Lithium Project

In September, Core announced it has executed a Mining Service Agreement for its Finniss Lithium Project with Lucas TCS. The contract will enable Core to achieve its milestone of commencing construction at the Finniss project before the end of 2021. The agreement with Lucas Total Contract Solutions allows the provision of open-pit mining and associated services at the company's wholly-owned Finniss Lithium Project. Lucas is engaged for the 3-year open pit mining services agreement for the Grants open pit, which is the first mine that will be developed at the Finniss Lithium Project and the first lithium production is expected to begin at the site in late 2022. The scope of work covers the construction and mining of the Grants Open Pit Mine including clear and grub, topsoil management, pads, roads, dumps, dams, bunds and water controls and open-pit mining at the site.

On September 30th, Core announced the board has approved the project's Final Investment Decision (FID) to proceed with the construction of the project. The Finniss project is fully funded, with project execution to start immediately, with mobilisation and site establishment and activities to commence in October 2021. Commissioning of the Dense Media Separation (DMS) plant and the first production of lithium concentrate is scheduled for Q4 2022. 250 jobs will be created as a result of the construction and subsequent operations, with Core being uniquely placed to capitalise on high lithium prices as early as 2022. The project will also benefit from being close to existing infrastructure, such as power, gas, rail and sealed roads to Darwin and Port Darwin, which is Australia's closest port to Asia. 

On October 26, 2021, Core announced construction has commenced on the project. Project development is fully funded, with $150 million in financing completed the week before including a $34 million placement to Ganfend. Site construction and establishment works are now underway in preparation for the commencement of mining activity later this year, creating 250 jobs across construction and operations. This will be followed by the Dense Media Separation (DMS) process plant construction by Primero commencing in March 2022, with the commissioning of the DMS plant and the first lithium concentrate production scheduled for Q4 2022. Approximately 80% of Finniss’ initial output is covered under 4-year offtake agreements with Ganfeng, one of the world’s largest lithium producers by production capacity, and Yahua, a key lithium supplier to Tesla. The modest project capex and strong cash flows as outlined in the recent Project DFS enable a rapid payback from the sale of the first concentrate and confirms Finniss as Australia’s lowest capital intensity lithium project

Financials

Quarterly Results (Q3 2021) 

Core Lithium has not had any significant revenue so far, matching its status as a junior miner not yet producing resulting in a loss of $6.90 million in Q3.

 

With a total pre-production capex of $89M for Finniss, Core Lithium is well funded, with $38 million in cash and a further $110.8 million raised via an institutional placement and share purchase plan. This means CXO is unlikely to do further raises, meaning there is little risk of further shareholder dilution. 

 

During the September quarter, Core Lithium focused on a number of initiatives aimed at further enhancing the value and potential of the Finniss Lithium Project. During the reporting period, the company:

 

  • Completed a Stage 1 Definitive Feasibility Study for the Finnis Project; 

  • Completed an Extension Scoping Study on the Finniss Project outlining a long-term lithium production plan, which was released to the market post-quarter end; 

  • Secured funding and a key offtake agreement for Finniss;  

  • Awarded key contracts to finalise and commence construction at Finnis; and

  • Made a Final Investment Decision to proceed with the construction at Finnis. 

Financial Position

Cash flow from operation is negative and was $2.6M in 2020. This was compensated by positive cash flow from financing activities, notably the sale of project royalty and capital raise. The net change in cash for 2020 was $6M.

 

The company has no long-term debt and $2.2M in current liabilities at the end of 2020. Most of the company assets exploration and evaluation expenditures, $26M out of $35M total assets. 

 

Cash on the balance sheet in Q2 2021 was $38M and the company has sufficient liquidity to meet 16 quarters' worth of current expenses. 

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Technical Analysis

 

The Technical Analysis Widget is an advanced tool that displays ratings based on several technical indicators only.

As with all technical analysis, signals are based on quantitative information on specific timeframes, as a result, Buy and Sell signals will vary from fundamental recommendations. 

Traders must ensure that any technical analysis information is considered against their individual trading plans and risk management techniques.

Dividends

Core Lithium does not pay a dividend.

 

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