TSLA - Liontown Resources: Kathleen Valley Progressing Nicely

Summary

• Since my last post, Liontown Resources, the Australian lithium icon, has been hit by a price reversal in lithium prices.
• Growing capacity plus a sapping of demand has seen spot prices now down -20% from November's all-time-highs.
• Headwinds in the EV auto industry are coming to the fore with a price war starting to break out in the United States.
• Despite this, Kathleen Valley is progressing nicely - work is tracking to schedule and company coffers remain flush with cash.

General Overview

It has been a comparably ugly time for lithium over the past 3 months. Despite some softness in the US dollar and a Chinese economy slowly coming online, it appears the fervor that saw lithium prices at 600,000 RMB is gradually abating. Those same macro headwinds have been reflected in Liontown Resources ( LINRF ) equity.

The past 3 months have not been terribly positive for Australian lithium miners.

Over the past 3 months, the company has shed -14% with only a recent rebound making amends for meaningful lows at the end of 2022. Other Australian lithium miners have suffered too, such as lithium junior Galan Lithium (GLNLF) -28.7% and Pilbara Minerals (PILBF). That poses grounds for concern, specifically as a price war in the United States starts to kick off.

Despite external factors impacting the lithium industry in general, I remain bullish on Liontown Resources. Its Kathleen Valley project continues to make good progress. With cash on hand, offtake deals in the books and construction fully underway, I thought it was worth re-visiting the company.

Let's find out more.

Lithium prices have started to stall into 2023 adversely impacting lithium miners such as Liontown Resources

Lithium Carbonate Prices

Prices for lithium carbonate have moderated since the start of the year, hitting 472,500 RMB per ton. That is the lowest prices have been since June and about 20% lower than all-time highs hit at the end of 2022. Weakened demand with increasing supply coming online have pushed key market participants to forecast a market surplus in 2023.

Added capacity has seen Chinese domestic output skyrocket despite cuts in lake-based smelters. Australia, one of the world's biggest lithium producers has revised global output for around 900,000 tons during the year.

Additionally, a price war in the electric vehicle space is increasingly becoming prevalent in North America with major original equipment manufacturers slashing prices. Accordingly, consumer discretionary sectors look like they are progressively starting to roll over.

Overview of the Kathleen Valley Lithium Project

Project Progress & Financials

Substantial progress has been made at Liontown Resources' world class Kathleen Valley lithium mine. Principal work packages have been awarded as procurement activities advance and recruitment is actively underway. Most mechanical and electrical work packages have been assigned to vendors.

Other notable milestones include the completion of the open pit preliminary works agreement, a power purchase agreement, concrete foundation work for the mill and the mining camp welcoming its first residents. Some project creep and cost escalation are adversely impacting the project as construction teams navigate a very fluid project environment.

Concrete pouring for SAG mill foundations has been completed.

Jagcor Civil Construction has completed concrete pouring for SAG Mill and Fine Ore Bin foundations marking the critical path for completion of the processing plant. Activity is planned to continue with several other work packages kicking off in March.

A grade control drilling program has commenced too in anticipation of the start of open pit mining activities. Grade control drilling will allow Liontown Resources to further optimize its surface mine design to maximize throughput and ore grade quality.

Inroads have been made on outstanding contracts - 80% of the mechanical equipment by value has been ordered and delivery continues to be on schedule. Lycopodium, the key contractor running engineering, procurement, and construction management activities, has been busy ramping up its operations.

Structural steel and plateworks packages have been allotted and considerable progress has now been made on concrete installation works for the processing plant. Bulk earthworks, structural mechanical piping, along with operational supply and services agreements are all tracking to schedule.

The accommodation camp will include 157 rooms with dragonfly lay-out

March will see suppliers consulted for remaining tenders - namely the electrical and instrumentation work packages, the underground mining contract, and mine services design and construction contract. By Q1, 2023, a 157 room mining camp will be completed, including kitchen and leisure facilities, for permanent employees.

Increases in capacity in the construction camp have been achieved, from roughly 400 rooms to 607 rooms, to debottleneck project schedule and complete multiple works with several contractors simultaneously.

Zenith Energy has been awarded a 15-year power purchase agreement for the supply of electricity to the Kathleen Valley project. This will include 46MW of renewable power and an additional 95MW hybrid power station which is expected to be the largest off-grid wind and solar renewable energy facility in the Western Australian mining industry. Liontown Resources has also successfully secured a $25M guarantee facility from Export Finance Australia.

Project optimization activities have been undertaken with the company increasing capacity design of the initial plant by 20%. Consequently, the facility will now be able to process 3Mtpa, up from previous designs of 2.5Mtpa. Surface mine design optimization is also being carried out concurrently.

In a boardroom reshuffle, Craig Hasson, the company's Chief Financial Officer has stepped down since my previous post. The company is consequently looking to strengthen its leadership team as construction work progresses.

In Q4, 2022, Liontown Resources spent approximately $1.4M on exploration and appraisal activities and an additional $3.4M on administration costs. The Australian lithium pioneer continues to maintain liquidity to finance its prolific lithium play with about $380M in cash and marketable securities coupled with a Ford ( F ) debt facility of another $300M.

Risk

Project risks such as schedule creep and cost over-runs are top of the risk register for Liontown Resources. This has been mitigated with advanced procurement activities and the allocation of most works packages.

The underground mining contract award will be a critical next step so project watchers will continue to have eyes peeled to see which company secures the work, with perhaps Australian underground mining icon Byrnecut or Perenti's Barminco in pole position.

Macro-economic risks persist also with lithium prices being under pressure, having a direct impact on company market capitalization. China's exit from restrictive Covid rules is likely to be a shot in the arm for an economy that was slowing, but a price war is starting to spread among EV manufacturers such as Tesla ( TSLA ). This is likely to be a significant headwind for Liontown Resources as it pushes for first ore.

Key Takeaways

Despite a rough couple of months, my outlook on Liontown Resources has not changed. Its prolific Kathleen Valley lithium play is primed to produce high quality battery grade lithium for years to come.

Despite some setbacks, construction is progressing nicely, and company coffers remain well stocked with cash to get the project over the line. As the famed Howard Marks once said, "Patience is essential".

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