Little Liontown set to show why it can be a seriously profitable lithium producer

25th January 2019
Barry FitzGerald

Liontown Resources is about to make its pitch to become a second-generation lithium producer from its Kathleen Valley project alongside the Goldfields Highway between Leinster and Wiluna in Western Australia.

That can be said because back in December, Liontown said work on a scoping study on a development had progressed quickly and was due for release in mid-late January, with the idea being to then transition to a feasibility study soon after.

As the scoping study is about to released, there is not much point in speculating what its key findings are.

Then again, as Kathleen Valley already has a maiden resource estimate in the bag and there are comparable mine developments owned by others that have come before it, like Galaxy’s Mt Cattlin and Tawana’s Bald Hill, it is worth a stab ahead of the main event.

The maiden resource was announced in September and came in at 21.4mt at 1.4% lithium and 170ppm tantalum, putting it the same league as Mt Cattlin, where a 42% increase in the resource to 16.7mt at a lesser 1.28% lithium was announced with some fanfare earlier this week.

Based on recent filings, the 1.8mtpa Mt Cattlin mine has been producing around 160,000tpa of spodumene concentrate and achieving a cash margin of close to A$600/t.

In short, anything close to these numbers would be a game-changer for Liontown, which last traded at 2.4c for a market cap of $27m, assuming consensus that spodumene will settle down from its recent retracement to sell for $US650/t in the long-term.

Lithium stocks in general had a tough 2018 and 2019 has not started out much better. The reason for that is fear of over-supply for the lithium-ion battery ingredient because of the “giga-mine” developments like Pilbara Minerals’ Pilgangoora and others in the works in WA.

It is now considered crucial for new lithium developments to be plugged into the lithium-ion battery supply chain through offtake arrangements and/or strategic equity alliances with end users. And some would suggest that new mine developments need to be giga-sized like their end users.

But the reality, as demonstrated by Galaxy and Tawana-scale developments, is that the end-user list extends well beyond the Panasonics of the world. If anything, small to mid-scale end users in the battery supply chain would jump at the opportunity to be the important customer to a Kathleen Valley-scale development.

They would also like the idea that Kathleen Valley is part of the second wave of lithium mines that will be needed as the 2020s unfold to meet even the lower end of forecast demand said to be coming from the electric vehicle and battery storage parts of the renewable energy revolution.

Being in the second wave means that any development would also benefit from the learnings - a nice way of saying mistakes – made in the first round of hard rock lithium developments. It would also benefit from the steadily deepening expertise in Oz of building and operating lithium mines.

Whether some of that finds its way in to Liontown’s share price in the wake of the release of the scoping study remains to be seen. What is more certain is that the company is about to make its pitch to join that second wave.

Coronado Global Resources (CRN):

There must be a deep-seated aversion to coal amongst the investing class. It is the only explanation for the savage treatment that has been meted out to last October’s $774m metallurgical coal float, Coronado Global (CRN).

Yes, the IPO of 20% of the Oz-US producer was clearly over-priced at $4 a share. And yes, met coal prices have eased somewhat from last year’s elevated levels as investors fret about the impact of China’s slowdown and the global impact of the US-China trade wars.

But sending the stock down to the $2.94 a share it has been trading at this week is a clear example as you will ever likely see of a leading stock – it’s the biggest pure seaborne met coal play in the world – being seriously mispriced by the market.

That came through loud a clear in Coronado’s maiden December quarter report, released this week.  While there were some (insignificant) misses across the group’s 22mtpa portfolio of mines (80% met coal), there was nothing that made anyone think that there would be much variance on forecasts made as recently as December by Coronado.

It forecast 2018 EBITDA of $US578m and 2019 EBITDA of $US737m. As there was a net cash balance of $US87m on completion of the offer, and presumably as an IPO sweetener, Coronado has said it intends to pay out 100% of free cash flow in dividends from October to the end of 2019.

Based on met coal prices in December, that pointed to a whacking 21.5% dividend yield for 2019 aheadof  the company reverting in following years to a yield of about 10% as it begins paying out 60-100% of free cash flow.

Credit Suisse, one of the many joint leader managers of the IPO, forecast this week a 2019 dividend of US42.55c for a 20% yield, falling to a still impressive US18.67c for a yield of 9% in the following year.

The more or less 20% yield for 2019 is obviously only for buyers of the stock this week, not those that paid $4 a share. Still, on the company’s December forecasts, a yield of 12.4% on the prospectus pricing isn’t all-bad.

And if the exchange rate was to weaken from here on, it would be all the better for everyone invested in the stock.

Credit Suisse has a target price on the stock of $4.10. Add the theorised capital gain and the dividend yield together, and out pops a 60% return.

“We’re happy to reiterate CRN remains incredibly cheap,” Credit Suisse said.

Another joint lead manager, Bell Potter, has a post-quarterly target on the stock of $4.30.

Should that come to pass inside 12 months, the broker is talking about a total expected return of 66.4%.

Given all that, it will be interesting to see if the investing class get over the current aversion to making new investments in coal no matter what the virtue signallers out there suggest they do with their investment dollars.

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