Core Lithium (ASX:CXO) Cashed Up And Ready To Sell Into A Hot Market

core-lithium-asx-cxo

Henry Fung

Henry is a co-founder of MF & Co. Asset Management with over 19 years of experience as a trader, investor and asset manager. Henry is the instructor of the Professional Trading Course, which is a free 5-day course on how to become a profitable trader.

February 9, 2023

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Today we will look at why we think Core Lithium shares (ASX:CXO) have great upside potential in our CXO share price forecast and analysis.

Core Lithium is poised to become Australia’s next lithium producer at its Finniss Lithium Project which is located proximately to the Darwin Port in the Northern Territory.

The Finniss Project has a high-grade lithium resource and a 12-year mine life.

It is claimed to be a very capital-efficient and the lowest-cost spodumene lithium project as it uses simple and efficient DMS (gravity) processing. This process ensures lower cost and low start-up risk.

In addition, Finniss boasts of excellent supporting infrastructure and a logistics chain that is best suited among Australian lithium producers for supply into the high-demand Asian region.

The Finniss mine was officially declared open on October 10, 2022, making it the first lithium mine in production in the Northern Territory and Australia’s only lithium mine outside Western Australia.

At the current CXO share price, Core Lithium shares have returned 47% over the last 12 months, substantially outperforming the ASX200, which has gained only 7% in that period.

Core Lithium (ASX:CXO) - CXO Share Price

About Core Lithium shares (ASX:CXO)

Core Lithium owns the Finniss Lithium project in North Australia.

It is a near-term, capital-efficient project with a high-grade lithium resource and infrastructure advantages from being located near the Darwin Port.

Finniss is located advantageously near population centers which makes it easier to source labor.

An 88 km sealed road allows for easy trucking to the port.

Core Lithium (ASX:CXO) - CXO Lithium Project

Core Lithium (ASX:CXO) claims it will be one of the lowest-cost lithium spodumene producers in the world once its Finniss mine enters production.

The project is also highly capital-efficient, given that its production is based on the simple DMS process which uses just gravity and water.

In August, Core strengthened its leadership team with the appointment of resources sector veteran Gareth Manderson as the first CEO of the company.

Manderson had served in various leadership and technical roles at mining giant Rio Tinto (ASX: RIO) for more than 22 years.

Early in the December quarter, Core successfully raised A$100 million from domestic and global institutional investors.

The capital strengthened the company’s balance sheet, provided working capital, and allowed it to pursue further growth.

In December, Core sold a pre-production direct shipping ore (DSO) consignment of 15,000 dmt with an average grade of 1.4% Li2O for US$951/dmt via a tender using a digital exchange platform.

The load was transported to the Darwin Port and, subsequent to quarter end, it was shipped to Fangcheng, China.

This shipment also meant that all logistics processes and procedures between the Finniss operations and Darwin Port were commissioned and tested in preparation for spodumene concentrate production.

The construction of the Core DMS Plant is scheduled to be completed by Q1 CY23.

The plant remains on track to produce the first spodumene concentrate during 1H CY23.

Core Lithium (ASX:CXO) has already entered into existing binding offtake arrangements for its spodumene production with Chinese lithium companies Ganfeng Lithium and Yahua Lithium.

Apart from the Finiss mine, the company owns rights to mine copper, zinc, silver, lead, base metals, and uranium across various sites in Australia.

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Core Lithium has a market capitalization of A$2.13 billion at the time of writing.

Core Lithium (ASX:CXO) Sitting On A Huge Opportunity From The Global Energy Transition, As Well As Other Metals

On 12 July 2022 Core announced a significant increase to the Finniss Lithium Project Mineral Resource and Ore Reserves Estimates.

The Mineral Resource Estimate increased by 28% to 18.9Mt at 1.32% Li2O and the Ore Reserve Estimate increased by 43% to 10.6Mt at 1.3% Li2O.

The mine life (LOM) was extended to 12 years, during which Core will produce 1.92 million tonnes of spodumene concentrate.

Further, over the LOM, the company’s average C1 Cost is only US$423/tonne.

Currently, Core’s Enterprise Value (EV) is $A1.94 billion (US$1.37 billion), or US$714 per tonne of its spodumene.

Note that at its latest auction announcement on December 14, Pilbara Minerals (ASX: PLS) sold two cargoes for a combined total of 10,000 dmt at an average spot price of US$7,552/dmt (SC5.5, FOB Port Hedland basis).

Clearly, there is a huge gap between the current spot spodumene pricing (US$7,552/t), Core’s average LOM costs (US$423/t), and what is reflecting in the EV (US$714/t) assigned to Core by the market.

Apart from this financial moat, the market realities point to massive growth in demand from EVs and battery storage between 10X and 30X over the period to 2040 because the lithium market is set to explode in the years to come as the world makes a secular shift towards electrification and decarbonization.

The two clear major drivers for lithium will be batteries for grid/personal energy use and vehicles.

It is expected that EVs will make up the bulk of new vehicle sales by the end of this decade and battery demand will grow ten-fold.

By Bloomberg estimates, demand for lithium will grow from a little under 0.6 million metric tons in 2021 to more than 2 million metric tons a year by 2030, triggering a likely supply shortage over the next few years.

According to company management, the global lithium sector is forecast to be in perpetual deficit.

This radical surge in demand will lead to a significant appreciation in lithium prices, thus creating a favorable operating leverage effect for Core Lithium (ASX:CXO).

Furthermore, apart from lithium, the commercialization of the company’s mining rights to copper, zinc, silver, lead, base metals, and uranium across different regions of Australia presents a long-term opportunity.

The company owns 100% interest in seven jurisdictions to mine the metals listed above. Similar to lithium, the demand for copper is expected to boom 10x due to use in batteries, turbines, wiring, etc.

The story is the same for zinc and silver, which have extensive uses in solar panels.

Further, uranium is particularly important because nuclear energy has been receiving substantial funding of late given the revived interest in this energy source after the recent geopolitical upheavals.

Apart from the fact that copper, zinc, silver, and uranium are important for renewable energy, as in the case of lithium, and enjoy the same bright prospects, these metals will diversify Core’s product offerings and can lead to better profitability from operating leverage.

Moreover, over the medium term, a big opportunity for Core is moving down the supply chain to produce lithium hydroxide from spodumene.

Lithium hydroxide is a form of lithium used in batteries and is expected to make up the bulk of the lithium market in the years to come.

The company can make substantially higher margins from moving downstream given that the current price of lithium hydroxide per ton is approximately US$79,000.

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When combined with Core’s ultra-low cost of spodumene, this could dramatically improve the company’s profitability and also increase pricing power with battery makers.

The company aims to get into lithium hydroxide processing in the third stage of its current plan.

Core Lithium’s (ASX:CXO) Stages 1 and 2 include getting to production and further expansions.

Stage 3 is scheduled for FY2024+.

With Offtake Agreements In Place, Core Lithium shares (ASX:CXO) Have Low Commercial Risk

The company confirmed in its AGM presentation that about 80% of its spodumene concentrate production was “secured via binding offtake agreements, including a binding offtake with Jiangxi Ganfeng Lithium Co., Ltd (Ganfeng), the world’s largest lithium producer by production capacity.”

Core Lithium (ASX:CXO) - Comparative customer

Ganfeng Lithium is a leading lithium producer and supplier based in China.

It produces and sells lithium compounds and lithium products, which are used in a variety of applications, including electric vehicles, energy storage systems, and consumer electronics.

Ganfeng Lithium has operations globally and is considered one of the largest and most influential players in the lithium industry.

Meanwhile, Yahua Lithium is a Chinese company that produces and sells lithium compounds and products for various applications, including batteries for electric vehicles and energy storage systems, as well as for use in the chemical, pharmaceutical, and metallurgical industries.

Yahua Lithium is considered a significant player in the lithium industry, with operations and customers globally.

Note that Core’s sales under the offtake agreements would be linked to market prices.

Therefore, Core would quickly be able to sell its output at market-linked prices and this is a serious commercial advantage and strength.

Notably, in October, the company’s discussions on a product purchase agreement with Tesla (NASDAQ: TSLA) failed.

However, the Company asserted that it continued to receive strong inbound interest in lithium spodumene concentrate from Finniss and was well-positioned to capitalize on high demand for available battery-grade lithium concentrate to complement its existing binding offtake arrangements with Ganfeng Lithium and Yahua.

Strong Sector But Single Product Portfolio and High Disruption Threat A Weakness

Core Lithium’s over-reliance on lithium as its bread-and-butter product is a structural weakness.

While the company owns mining rights for several other metals including copper, silver, zinc, and uranium, most of these projects are far from being commercialised and the company has expressed interest in selling some of these interests to fund its lithium aspirations.

Though lithium has a very bright future at this point, it is still a very expensive and exotic metal, which has prompted extensive efforts all over the world to build batteries based on chemistries made up of more abundant materials.

Recycling, New Technologies, and Inclement Weather Are Threats

However, Core Lithium (ASX:CXO) must contend with a few potential threats.

The first is the increasing focus on the recycling of batteries and materials.

Over the next few years, recycling capacity and technology are expected to improve dramatically.

Recycled batteries/materials will add supply to the market, thus suppressing lithium prices and making mining less feasible.

Secondly, there is a lot of investor interest and funding flowing into mining technology due to the bull run in commodities that will benefit from clean electrification.

Lithium is an obvious target and it is possible that newer technologies could be detrimental to Core’s current business model.

Inclement weather due to climate change can also affect Core’s mining operations, production and profitability.

During December, its mine site suffered from the heavy rainfall unleashed by Tropical Cyclone Ellie.

“This led to the accumulation of a significant volume of water in the base of the stage one portion of the Grants pit,” the company wrote in its December quarterly update.

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“Implementation of engineering solutions to monitor pit wall stability, improve dewatering and allow mining to continue safely in periods of high rainfall were implemented during the quarter and continue to be improved.

Impacts of the wet season on mining volumes will be assessed in the subsequent quarter.”

Weather events cannot be under-estimated, and this event has lowered expectations at Goldman Sachs of additional DSO cargos from Core due to mining difficulties.

Core Lithium Shares (ASX:CXO) Financials

Core Lithium is yet to enter production, hence no operational financials are available.

The sale proceeds of a sale of pre-production direct shipping ore (DSO) shipment will only be received in the March 23 quarter, though the company is on track to produce first spodumene concentrate during 1H CY23.

However, the company said in its December quarterly report that it completed an underwritten institutional placement to raise $100 million.

It issued 97.1 million shares at $1.03 per share.

The placement received a solid response from new and existing high-quality domestic and global institutional investors.

Core ended the quarter with $125 million in cash. Subsequent to quarter-end, it received cash of A$20 million from the DSO sale auction process.

During the quarter, Core awarded Primero a five-year Operations and Maintenance contract for the DMS processing facilities as well as related Tailing Storage Facilities and infrastructure.

It expended $51 million on plant, equipment and mine development activities and $7 million on exploration.

The company will use a part of the share placement proceeds to organically grow its business by fresh exploration for lithium resources on its owned land adjacent to the Finniss project.

These additional lithium resources will be handy at a time when the lithium market is facing a supply deficit and prices of the battery metal remain elevated.

Core Lithium Shares (ASX:CXO) Valuation

Due to the premature nature of relevant competitors and variation in project timelines, given financials (pre-tax vs after-tax IRRs), offtakes with differing terms, and inconsistent long-term pricing assumptions it is not possible to draw a reasonable valuation comparison of Core Lithium versus its peers.

However, on the Price to Book metric, at the current CXO share price, Core Lithium shares compare as follows:

  • Core Lithium 8.75
  • Liontown Resources 7.62
  • Piedmont Lithium 4.21

Though seemingly expensive, Core is best positioned for production visibility in the first half of 2023.

For Core Lithium Shares (ASX:CXO) – The Stars Are Nicely Aligned

Core Lithium is sitting on reserves of a product that is forecasted to see boom times in the foreseeable future.

The company’s flagship project is fully financed, and strategically located near the port of Darwin.

Within kissing distance of commercial production of spodumene concentrate, and compared to less-advanced lithium projects worldwide, Core, therefore, has a lower risk profile.

Moreover, its low-cost production is coming online at a time when spot lithium prices are hovering at all-time highs.

Furthermore, the sale of Core’s product is already sewn up with offtake agreements, and in the longer term, the management is eyeing avenues for adding further value, such as processing of lithium hydroxide, as well as growing its lithium resource base organically and in parallel with the successful implementation of the Finniss project.

The CXO share price has been on a downtrend on account of the capital dilution for the $100 million issue.

However, with production on the horizon, and bullish lithium prices, the stock may be rerated.

Investors may consider accumulating the stock as a long-term play on a sunrise industry.

Are you looking for more stocks to buy? In our opinion, buying the right stock at the right time is just half the battle – knowing how to manage the position and risk is just as, if not more important. Take our free 5-day trade like a professional course, it give you the foundational knowledge required to become a profitable trader.

This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.

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