Core Lithium has produced its first spodumene. Can the stock make it in time for high prices?

Macquarie Research published a note on Tuesday analysing Core Lithium’s (ASX: CXO) recent performance in light of the company’s first production of spodumene concentrate on Monday. 

The basic run-down is as follows. 

The investment bank has rated CXO as OUTPERFORM (read: BUY), and slapped on a price target of $1.30.

This reflects a total shareholder return of +39.9% from the current market price - as at 12:15pm (AEST) Tuesday, CXO’s share price is 92.3c.

What’s this about spodumene? 

CXO minted its first batch of spodumene concentrate on Monday from the company’s 100% owned Finniss project in the Northern Territory. 

For simplicity’s sake, spodumene can be thought of as a “crude” type of lithium. Whereas crude oil is refined into fuel, kerosene, and other products, spodumene requires further refining into lithium.

In the coming months, the spodumene concentrate in question will be processed by buyers into lithium feedstock products and likely incorporated into the Electric Vehicle (EV) battery supply chain. 

The spodumene is set to be shipped in April. 

Year of big firsts for CXO 

Monday’s news followed the company sending off its first shipment of lithium ore to China in January, an event which saw NT government ministers attend the port to espouse the importance of critical minerals. 

CXO’s NT lithium mine is the only operating lithium mine in Australia outside of WA. 

When will revenue generation begin?

Macquarie Research highlighted CXO has guided its first sales to mid-4QFY23 (for those playing at home, Q2 of the 2023 calendar year).

“Concentrate production is currently occurring from previously mined ore, with the first shipment expected to be completed by the end of April 2023,” analysts wrote. 

“First production has occurred a quarter [earlier] than our expectations.” 

Analysts highlighted, however, the impact of wet weather on the Grants open pit development, which is likely to impede the development schedule of the Finniss project’s planned ramp-up. The bottom of Grants is currently flooded. 

Wet weather may also impede CXO’s exploration of nearby landholdings. 

“CXO owns a significant tenement around the project which presents upside potential to its resource base….the previous round of capital raised should enable CXO to accelerate its organic growth.” 

All in all, however, the bank expects this to ultimately reflect a worst-case delay on the scale of weeks. Further concentrate production is expected to occur by July this year.

The lithium price question 

While Macquarie highlighted that the first production of spodumene concentrate is a key catalyst for company performance, it also noted CXO is at the mercy of commodity price movements. 

“We estimate that CXO’s current share price is factoring in a long-term spodumene price of ~US$2,500/t,” analysts wrote. 

CXO’s share price has typically underperformed the spodumene spot price, which is currently higher. Macquarie’s price target is based on what it analyses to be CXO’s US$2.5k/t assumption. 

Lithium price volatility 

There is wisdom from the analysts authoring the note in holding concerns for the longevity of higher spot prices.

Lithium prices are falling from their November peaks, and while the world’s best-known pure play battery metal remains elevated (both in terms of price and reputation), there is evidence the lithium carbonate price could be in a correction. 

In the fashion of the “pork cycle”, there are also concerns. In short, a lot more companies are now exploring for and producing lithium, with Australian supply forecasts 32% higher than they were last year.

The volatility of commodity prices may not be enough to frighten veteran investors, but then there is a third issue. 

EV sales growth to slow 

Norway, Germany and China have removed key subsidies encouraging EV growth and Macquarie expects the pace of EV sales growth to be slashed by half in CY2023 vs. CY2022. 

The price of lithium is ultimately driven by demand from battery makers (as well as metals traders) and therefore a cooling down in EV sales would likely lead to a softening of demand. 

In a scenario where the spodumene spot price falls to US$1k/t, Macquarie’s price target for CXO would be much lower—beneath where it currently trades in the mid-90c range.

CXO's one year performance chart