Yes, there was:
Material upside to our base case at spot prices- Our valuation and price target for CXO is dominated by our development scenario of the Finniss project. On our base case forecasts, the company will deliver its first spodumene production in 2HFY23. We note the company expects to complete a shipment of DSO lithium before the end of 2022, which present upside to our base case.
- We estimate that CXO’s current share price is factoring in a long-term spodumene price of ~US$2,300/t. As an emerging lithium producer with production expected within the next 12 months, we believe the near-term buoyant lithium prices present a tailwind for CXO’s valuation and earnings. A spot price scenario generates an NPV of A$3.00/share.
Leaving themselves plenty of room for upside revision.
I'm probably going to get smashed by the hardcore zealots for saying this, but I think Macquarie have been somewhat reasonable with their coverage of CXO. Obviously, they opportunistically jumped on board the mess created by GS to make a quick buck (as you'd expect if you were a MQG shareholder), but at least they have been transparent with their evaluations.
They dropped CXO to neutral when the SP ($1.86) exceeded their $1.80 PT stating:
"We downgrade CXO from Outperform to Neutral, given its recent strong share price performance and the deterioration of the near-term earnings outlook"
It is not entirely unreasonable given the SP exceed their PT, nor is it unreasonable to speculate about a potential delay to production – as demonstrated by the fact this thread is filled with similar speculation. CXO is not yet a producer, and until it is there is increased risk, volatility, and speculation. It is unavoidable.
They dropped the PT to $1.30 stating:"The downgrade reflects a reduction in the resource and regional exploration option value, as we believe the share price is unlikely to capture this upside potential until the outlook for first production becomes more certain. In November we delayed our forecast first production from 2HFY23 to 1HFY24. Given the recent senior management changes and wet weather impacts, we expect the company to deliver the first spodumene in the 1HFY24with additional DSO shipment in 2HFY23."
Again, this is not totally unreasonable IF the speculated delays manifest. Conversely, they have made it clear that should they be wrong about the delays, they see a significant upside to the tune of $3.00/share NPV at spot price.
To be clear, I’m not saying I agree with everything Macquarie says. I don’t think anyone should make investment decisions based entirely on a broker’s coverage and would always encourage people to do their own research.
My takeaway is this - I am not fussed by the short-term SP antics as the fundamentals have not changed. The SP is being held down by a combination of fear of lithium oversupply, uncertainty over production timelines and global recession risks.
As far as lithium oversupply is concerned - regardless of whether we have seen the peak price of lithium or not, there is a reasonable consensus that the lithium price is going to remain historically elevated for some time. Hopefully an equilibrium price is found soon which should restore some confidence and, as Macquarie point out, a 9% reduction in spot price (3% by PLS auction) does not justify a 43% reduction in value.
This kind of market overreaction is not unique to Lithium. Have a look at the SP of thermal coal companies in November after everyone panicked about thermal coal collapsing, they were down 25% but have since recovered.
As far as production is concerned - It is only a matter of time until CXO becomes a producer. There are no more hoops to jump through, no funding, permits etc needed and we also don’t have to worry about dilution. It seems the real question is whether production will commence 2HFY23 or 1HFY24 (which in theory could be as little as the difference between June or July 2023).
Once CXO hit’s producers’ status the market should react positively to the certainty, by which stage there will likely be an increased mineral resources and LOM.
As far as recession risks – well your guess is as good as mine, but economic downturns don’t last forever, and profitable companies tend to fair best.
So, it’s likely to be a bumpy ride for the next few months and there will be more bad days to come, but like AJS and Whisky, I choose to focus on the fundamentals and try to ignore the noise. $2 by end of year is not realistic - $2 in 6 months may be (which for perspective is still over an 80% upside on current SP).
My thoughts only - DYOR.
(20min delay)