Diversified Metals & Mining
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.
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 in Q4 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.
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
In light of strong share price appreciation, we moved our recommendation on Core Lithium to a HOLD as of March 31, 2022, previously BUY, with an increased target price from $1.40 to $1.60. We moved Core from Hold to Buy from early March, after Core announced a binding term sheet agreement with Tesla to supply the EV maker with 100kt of lithium spodumene concentrate, although since then there has been no material news we view warrants increasing the target price above $1.60 (as it stands. We will review CXO's target price upon further announcements, although at $1.60 and a market cap of over $2.6 billion, we believe CXO is currently fully valued, and as such the move to HOLD is appropriate in our view).
Despite this, the Finniss mine entering construction and larger reserves recently found mean exploration risks have for the most part been mitigated, however, the current valuation seems stretched and appears to be moving on speculation and surging lithium prices. Despite the project being fully funded, there are still risks that completion may take longer than anticipated (due to covid possibly) or costs may blow out.
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. The acquisition of six mining leases around Finniss adds the possibility to further expand production output and extend mine life.
Considering the continued push for low-carbon green technology and the increasing debt levels, permanently high demand for these metals is likely to provide a high price floor for lithium over the next few years.
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.
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.
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. Average annual production is expected to be around 173ktpa of high-quality lithium concentrate at a C1 opex of US$364 per tonne. 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 Ganfeng. 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. Under the agreement, Core will supply Ganfeng with 75,000 of Li2O spodumene concentrate per annum over 4 years. The offtake provides for pricing referenced to the market price for 6.0% Li2O spodumene concentrate, adjusted for actual Li2O content, and includes an agreed floor price. The Offtake adds to the previously announced binding offtake agreement with Yahua for 75,000tpa over 4 years. Core also holds a non-binding Memorandum of Understanding (MOU) with Geneva-based Transamine Trading for the supply of 50,000tpa of spodumene concentrate from Finniss over a five-year period.
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.
To further add to a string of good announcements, in December Core stated it had executed an option agreement to purchase six granted Mineral Licences (ML) that include over 30 historic pegmatite mines. Core's initial evaluation drilling has confirmed the prospectivity for these lithium-rich pegmatites for spodumene mineralisation. Evidence of lithium fertility and spodumene mineralisation has already been intersected in multiple drill holes during first pass exploration on the MLs, with significant tin, tantalum and niobium levels also being identified. The new MLs have significant potential to accelerate opportunities for CXO to expand and extend its lithium production at Finniss.
Quarterly Results (March Quarter 2022)
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 $2.17 million for the first quarter of 2022.
With a total pre-production capex of $89M for Finniss, Core Lithium is well funded, with $155 million in cash and cash equivalents. This means CXO is unlikely to do further raises, meaning there is little risk of further shareholder dilution. The company also holds no debt, so will not be adversely affected by rising interest rates later in the year.
During the March quarter, Core Lithium focused on a number of initiatives aimed at further progressing the Finniss Lithium Project. During the reporting period, the company:
Advanced construction activities at the Finniss Project. Pleasingly, development at Finniss continues to run according to schedule.
Reached a binding Term Sheet agreement with Tesla to supply up to 110,000 tones of Li2O spodumene concentrate from the Finniss Project over a term of 4 years, with pricing referenced to the market price for spodumene concentrate, subject to a price floor and ceiling.
Executed the acquisition of six highly prospective mining leases located adjacent to the Finniss Project; and
Reported significant drill results at BP33 and Carlton deposits, which are expected to result in an increase in the Mineral Resource estimates for both sites.
Core Lithium does not pay a dividend.
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