Once I had a chance to digest the announcements I wrote the following (sorry for the formatting, this hasn't copy and pasted very well). You can find the original here - https://10xhunter.com/core-lithium-10x-company-report-26-07-2021-update-asx-cxo/
These are my thoughts only and not financial advice.
Today Core Lithium (ASX: CXO | Company website) started the trading day with a flurry of announcements which I have included below:
- Stage 1 Definitive Feasibility Study (Download)
- Scoping Study Confirms 10 Year Lithium Production (Download)
- Definitive Feasibility and Scoping Studies Investor Presentation (Download)
- Scoping Study Identifies Value Potential of Lithium Fines (Download)
DFS Analysis
Before jumping into the deep end here, it’s worth nothing that Core has previously produced a DFS (Download) in 2019, so it is worthwhile reading both documents to get an idea of how the project has evolved over time.
The main details of the DFS are contained on Page 2 of the DFS in a set of summary tables:
At first glance I was initially underwhelmed with the figures quoted in the DFS. So let’s start off with the concerns I have with the DFS, and then I will get into the opportunities.
Concerns
There are a fair few things to get though, so I’ll try to keep it short and to the point.
NPV
The first thing I looked at when reviewing the report was the Net Present Value or NPV numbers for the project, which Core have stated to be $170m. This number is what most investors use to assess what project is worth, which is then reflected in the overall market capitalisation of the company. The DFS that Core released in 2019 had an NPV of $114m, so an increase of $50m isn’t too bad, but I was expecting more. Especially with Core deciding to use an 8% discount rate this time, compared to a 10% discount rate in the 2019 version.
Overall my assessment of the NPV figures is that they are disappointing and they will likely sway new investors away from Core and over to other higher value NPV lithium projects.
Total Ore Mined
When reviewing the NPV, it’s important to contextualise it against the overall project. If you go to Page 21 in the DFS report you will see that the Total Ore Mined is quoted at 7.4Mt and not 14.7Mt. The reason for this is that the DFS has to be calculated based on Proved and Probable reserves, they are not able to include other more speculative resource categories in the assessment.
I think the management team at Core understand that people might be confused about this, and on Page 19 you can see they have included the words “Eventual Economic Extraction”, which in my opinion is management trying to underscore that the 7.4Mt is just the start.
Capital
The capital costs for the project have been split into initial capital and production capital expenditure. The initial capital costs are about what I expected them to be, and $90m is about as cheap as you can hope for to get started lithium mining. So on that front it’s good news.
The bad news is that because Core have so many deposits, Core will need to spend plenty of capital money accessing them all. If you look at the next image below, you will see that capital costs are broken down per deposit. This is in my opinion one of the biggest problems that Core has faced and will continue to face. Investors are looking for a big deposit with long life of mine (e.g. Kathleen Valley). Having lots of small deposits costs money to access them, and that money would otherwise be profit.
Operating Costs
Operating Costs are higher than what I had expected, but they are not unreasonable when considering that a large part of the operation is planned for underground mining. I’m not currently aware of any other lithium majors performing underground lithium mining, so it will be interesting to see how closely the planned costs are to actuals when it get’s started. Overall though I am content that these costs look accurate enough when compared to other companies.
Core provided a couple of interesting charts on Page 35 of the DFS report. The most interesting of which is the All-In Sustaining Cost chart which I have included below. This shows a clear viewpoint of the projects operating expenses against a projected price of Lithium Spodumene, with a healthy gap between the two. Assuming the pricing from Roskill is on the low side (which I think it is), then there are some healthy profit margins on offer.
Exchange Rate
One of the biggest risks/opportunities to the project is the exchange rate. In the DFS Core have elected to use a base case of 70c AUD/USD rate, however, at the time of writing the exchange rate is sitting at 74c.
That means that the NPV figures quoted throughout the report are already close to $100m off. There is every chance that the USD gets stronger against the AUD and we get to 70c, but there is also a chance that it goes the other way, and the DFS is starting at an already optimistic level.
This type of difference could result in some very lean years for Core if things don’t move in line with their DFS projections, and in my opinion they have only elected to use 70c because the entire DFS looks very poor if they were to use the current exchange rate.
Royalties
As a long term Core shareholder, I remember the days when it seemed to be endless capital raisings and little progress towards mining, and Core management decided that instead of trying to raise capital from existing shareholders, they would sell a portion of the project to fund the next periods activities. At the time I thought it was an interesting idea, but not one I ever really wanted.
The result was that Lithium Royalty Corporation picked up 2.5% of gross revenue (not profit) from the sale of products from the Finniss Lithium project for about $8m. I’m not going to do the math for you here, but when Core gets mining, the investors at Lithium Royalty Corporation will end up making a very good return on investment.
On top of this, there are also royalties to be paid to the NT Government. You can find the specifics of this on page 36 of the DFS report.
What that all means for shareholders is that there is less profit, which ultimately means a less attractive project.
FID Timeline
My final concern (which is a pet peeve of mine regarding Core Management) is Core’s inability to meet self imposed timelines. This DFS report is a good example of that – it was scheduled for Q2 2021, but was delivered almost a full month late. Another self imposed timeline that Core management have provided has been that FID will be completed in Q3 2021, yet if you look at the Gantt chart below, the timeline appears to be shifting out to H2 of 2021.
The realist in me says that it will be delivered before January 2022 – months late.
Opportunities
I know I’ve painted a fairly poor picture to this point, but it’s not all bad news – it just depends on your time horizons and understanding of the company below the headline figures presented.
Resource Growth
The most obvious opportunity for Core is in increasing the resource and life of mine. Core is spending plenty of money doing just this and I expect if their history is anything to go by, they will succeed.
As investors can see in the image above, Core has 7.4Mt defined and ready to mine. I expect the majority of the Mineral Resources to also be converted into Ore Reserves over the coming years. Core have also speculated on resource targets for the prospects in the image below.
This leads me to believe that Core will likely have close to 25Mt of Ore defined as resources by the time they start mining, or be well on the way.
Stage 1 shows 8 years of mine life, and assuming 25Mt is accurate, then the company can expect to mine for 20+ years. Noting that there are more exploration targets to be tested, and the potential monster deposit at barrow creek just waiting to be tested, it may grow further. (Note to Steve Biggins – Barrow creek really needs to be drilled, it could be Core Lithium’s Kathleen Valley).
Pricing
While the Lithium price will play a significant role in the value of Core’s Finniss project, it’s something that is outside of the control of Core. The pricing information they have used in the DFS appears to be very conservative considering some of the quoted prices for spodumene over the last 6 months. The known prices for 2021 are well above what Roskill have projected, and I expect that trend to continue.
Core has included the following slide in their DFS presentation pack, and it shows the supply/demand gap. Assuming the supply deficit eventuates and is as drastic as what market commentators are indicating it will be, then I see the pricing forecasts provided by Roskill being well below what may transpire, and that’s great news for Lithium producers.
Cash Flow
While there seems to be new lithium projects popping up every day, very few are close to production, and fewer still will ever make it into production. Core as a producer with positive cash flow will be in an amazing position when the lithium shortage is biting the hardest. Not only will they have an ever expanding resource, but they could easily acquire a second project from a junior with not enough cash flow to bring it into operations.
Getting into production ASAP is what is required here, but it also needs to be done on favourable terms with customers.
Future Strategy
The biggest opportunity for Core is that they will be mining an in demand product at the height of a predicted shortage. Yes the current NPV number looks small, and yes there are plenty of risks associated with the project, but long term it looks bright for Core.
Stage 1 gets Core into production and cash flow positive with an 8 year life of mine.
In Stage 2 it is possible investors could see Core with a resource size of closer to 25Mt. Assuming a larger resource, Core has noted a possible expansion of production of the Finniss project. Stage 1 is processing 175ktpa, Stage 2 could easily double that.
Taking a look at a Pilbara Minerals (ASX: PLS), they have outlined a production growth plan in the image below. I expect Core to do something similar once in production.
Stage 3 introduces a shift in the entire project and it’s potential profitability. Lithium hydroxide is a different beast with much higher margins, however, it’s more of a chemical processing project than it is mining, so it’s not without risks. Core has already demonstrated that it’s spodumene is well suited to be converted into high quality lithium hydroxide, and this would see the project become significantly more profitable overnight.
Future Market Capitalisation Prospects
Based on the values quotes in the image above, I have extrapolated some potential market capitalisation values for Core Lithium assuming a fixed 70c AUD/USD exchange rate. It’s not a perfect science, but it should be relatively close enough to provide a ball park estimation of potential future value.
Notes/Assumptions:
- The yellow is Stage 1 DFS + Extension Scoping Study.
- The Green is Stage 1 DFS + Extension Scoping Study including Lithium By-Product.
- Fixed price for Lithium fines By-Product independent of Spodumene price.
Summary
While initially I was disappointed with the DFS report, it’s not all bad news.
Assuming the company continues with it’s current plans I see very little downside risk for Core Lithium at the current share price, if anything, I see this as putting a floor under the share price.
As the team at Core expand the ore reserves, it’s clear that the project economics will continue to improve, and with the strong increase in lithium prices, I still expect further upside in the share price.
In the short term, I expect that FID/Financing will be the most likely triggers for share price appreciation, however, it is also possible that this news is somewhat priced into the current share price. In the short term I see the CXO share price trading between 25c and 35c.
Medium term (2022 – 2024) my view is that it looks to be a high likelihood scenario that Core will progress towards 20Mt-25Mt and will expand their processing plant. Should this occur then a ballpark figure of $800m-$900m market capitalisation would be achievable at current lithium prices, indicating a share price of approximately 65 cents per share. Noting that if the Lithium price takes off and core is able to capitalise on the high prices then 85c – $1 per share is possible.
Longer term (> 2024), assuming a lithium hydroxide facility with healthy margins, lithium supply deficits driving high lithium prices and further exploration success could see a market capitalisation of approximately $1.5bn – $2bn, although there is plenty to do before Core gets to this point.
Reminder - These are my thoughts only and not financial advice.
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