The lithium miner that knocked back Tesla Peter Ker Peter KerResources reporter Apr 25, 2023 – 10.35am
A supply contract with Tesla has been the golden ticket for Australian battery minerals producers over the past few years, but Gareth Manderson did not have stars in his eyes when Elon Musk’s electric car company came shopping for lithium.
Manderson had been chief executive of Core Lithium for barely two months last October when he walked away from the company’s long-running talks with Tesla over a four-year lithium supply contract.
Core Lithium CEO Gareth Manderson at Alice Springs. Lisa Hatz
Core’s army of retail investors were miffed, but Manderson was determined to make decisions for the best long-term results.
“In the early days of any business that is trying to get up, including a number of the lithium players like ourselves, having a large OEM [original equipment manufacturer] with a brand like that [Tesla] which is willing to endorse the project and the business actually adds a lot of value,” Manderson says when asked about the gravitas offered by a Tesla deal.
“But at the end of the day, we are a business and we need to generate the right level of cash and returns for investors and shareholders, so at some point it becomes a little more about what is the commercial arrangement that is most appropriate.
“We had our position of what we thought was reasonable, Tesla had their position, and we were unable to find something that could work for both organisations.”
Core now has contracts to sell its lithium to less famous consumers such as Chinese industrial company Sichuan Yahua.
For all the glamour that comes with announcing a mineral supply agreement with Tesla, the terms offered by the world’s pre-eminent electric vehicle brand are rarely the most generous in the market, according to multiple boardroom sources in the Australian mining industry.
Tesla is well aware of its brand power and has been known to factor that into negotiations for supply of metals such as lithium, nickel and graphite. For small and little-known battery minerals producers, the halo effect of being associated with Tesla’s brand might be worth a cheaper rate on mineral sales.
Even for big miners such as BHP, which sells Australian nickel to Tesla, a supply contract is a valuable public relations tool to illustrate a strategy pivot towards “future facing” metals rather than the coal mines that generate dramatically more revenue.
Manderson says he was determined to make sure last year’s cancellation of talks with Tesla was respectful, rational and not necessarily the end of the road. “We are still very comfortable having conversations with Tesla about offtake, that door is still open,” he says.
“We need to be playing the long game here. At the end of the day, it is about being a mature business.”
Manderson’s determination to play “the long game” chafes against the market perception that has followed Core over a spectacular three years in which it surged into the S&P/ASX 200 on the back of a 25-fold share price rally.
According to the dominant market narrative, Core has been fast to market with a small resource that will struggle to support a long-life, low-cost mine.
Those perceptions were partly built on truth. Core swiftly developed a small mine called Grants about 90 kilometres south of Darwin port. It was initially expected to have a lifespan of about four years, although that has since been extended to about seven.
High prices The first delivery of Core’s lithium-rich spodumene concentrate from Grants reached Darwin port early this month, and payment is expected before the end of the month, meaning the company has started selling lithium while prices remain high.
CRU analyst Martin Jackson said spodumene concentrate was fetching about $US4500 ($6719) a tonne in Chinese daily “spot” markets in the first week of April. That price is down from about $US6000 a tonne in December, but is still astronomically high compared to the $US400 a tonne the commodity was fetching in mid-2020.
Most experts expect prices to fall further. Barrenjoey is predicting a return to $US2500 a tonne in 2024 and $US2000 a tonne in 2025, before settling at a long-term level of $US1500 a tonne.
The argument that Core will flame out when the Grants mine is exhausted fails to recognise the bigger strategy to develop numerous small mines in the Finniss province around Grants.
The next mine is likely to be less than 4 kilometres from Grants at a prospect called BP33, and subsequent pits will need to be developed at other nearby prospects.
“We need to be good at opening and closing mines that have a four- to six-year timeframe,” says Manderson of the key technical challenge that will determine success or failure for Core.
Core’s collective mine life at Finniss across its multiple prospects is about 12 years, according to its latest statement of reserves and resources.
“Not a bad base to start with,” says Manderson, who spent two decades with Rio Tinto before joining Core.
Drilling results published on April 18 increased the official resource at Finniss by 62 per cent. Further analysis will be required before the new drilling officially adds to mine life, but investors took it as a sign there was further value to be unlocked at Finniss; Core shares rallied 6.5 per cent during the April 18 trading session.
The surge means Core has rallied 30 per cent since March 23, inflicting pain on the short sellers that have bet on its shares falling.
More than 10 per cent of Core shares were sold short as of March 22, and the company was still the fifth-most shorted stock on the ASX on April 12, when 9.3 per cent of the register was in the hands of hedge funds.
Many lithium stocks have been targeted by short sellers this year as investors bet that prices for the battery mineral will slide, but Core’s strategy to develop numerous small mines has equally frightened some investors who fear it will face a recurring capital spending bill.
Macquarie analysts are less concerned on that point; they predict Core will generate $162 million of free cash flow in the year to June 2024 after accounting for spending on new mines.
Macquarie reckons free cash flow will exceed $600 million in each of the subsequent two years, although that forecast was based on spodumene prices above $US5000 a tonne.
Core has not provided the market with formal volume guidance, but the broker expects the company to produce about 80,000 tonnes of spodumene concentrate in the year to June 2024, then closer to 180,000 tonnes in each of the subsequent nine years.
Macquarie’s model assumes Core is still producing spodumene concentrate at Finniss in 2039, an expression of confidence that raw drilling data will eventually be converted into official reserves and bankable mine life.
Core’s plan to develop numerous small mines that service a single processing hub at Finniss is unusual in the Australian lithium sector and the opposite of the approach taken by rival lithium star Liontown Resources, which has gradually drilled out a single, large deposit at Western Australia’s Kathleen Valley.
Liontown’s exceptionally large orebody is very well understood and will support at least 23 years of mine life at one location, but the studious approach to design and development means Kathleen Valley remains at least a year – and hundreds of millions of dollars of extra investment – away from first sales.
Liontown’s more patient strategy is not wrong; on the contrary, it has been vindicated by a $5.5 billion takeover offer from US giant Albemarle.
But the point is what works for Liontown’s big asset almost 700 kilometres from the nearest port does not necessarily suit Core, whose proximity to Darwin port makes more marginal orebodies viable.
“Core is producing concentrate a lot earlier than our peers, but we don’t have the same support of a resource base because the drilling and exploration base just hasn’t been done across the leases,” says Manderson, who is in his eighth month in charge.
“Only something like about 10 per cent of the [Core] land area has been touched.”
That will change fast. Core has promised to double exploration spending to $25 million this year to unlock the secrets that lie within its vast tenement package. Manderson hopes that work can gradually put to rest investor concerns that Core is here for a good time, but not a long time.
“We need to do the exploration work to understand what the opportunity might be either in terms of extension of mine life or increasing production,” he says.
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