IGO's lithium headwinds push shares to 15-month low. Is there any value at these levels?

Shares in IGO (ASX: IGO) spiraled 9% lower on Monday to levels not seen since July 2022 after warnings that it may be forced to lower lithium sales amid waning demand for battery metals.

IGO has a 24.99% interest in Australia’s largest hard rock lithium mine – Greenbushes – through its joint venture with Tianqi Lithium. Tianqi owns 51% of Greenbushes, with US producer Albemarle owning the remaining 49%. 

IGO weekly price chart (Source: TradingView)

September Quarter At A Glance

• Group sales revenue of $248.4 million, in-line with the prior quarter as higher sales volumes and realised prices at Forrestania offset lower volumes and prices at Nova (both nickel assets).

• Underlying EBITDA of $362.2 million, down 42% reflecting lower lithium prices and sales volumes at Greenbushes.

• Net profit of $391.5 million, up from a $454.2 million loss in the prior quarter due to the impairment of Western Areas assets. 

The quote: “IGO notes that December quarter spodumene sales from Greenbushes are likely to be lower than production due to the deferral of some product shipments during the current quarter,” Acting Chief Executive Office Matt Dusci said. 

The numbers: “Spodumene concentrate sales from Greenbushes in the December quarter are likely to be approximately 25% lower than forecast production for the quarter.”

The prices: “Chemical grade spodumene concentrate pricing has been reset to US$2,984/t, effective for sales between 1 October 2023 and 31 December 2023.”

Greenbushes plans to mine ‘as normal’ and stockpile concentrate. Given the bearish demand outlook, is an IGO at a 2-year low an opportunity or a hard pass? Let's see what brokers think.

Citi: Downgraded to Neutral

Citi’s analysts believe things could get worse for IGO in the December quarter given:

• The Cosmos Project faces higher capital and operating costs, changes to mine production schedule and development delays

• Lower production at Greenbushes in the second half

• Overhang that the joint venture will be forced to move to a higher-frequency price mechanism vs. the current one quarter lag (which will result in a 13% downgrade to earnings)

“Today’s news highlights the challenges of operating in a JV and gives the bears who were concerned on counterparty risk an angle,” Citi analysts said.

Goldman Sachs: Reaction appears overdone 

Goldman maintained a Buy rating on IGO given its attractive near-term free cash flow years relative to its peers and supporting upside due to further capital returns. It’s upbeat thesis was based on two key factors:

1. If the 25% drop in offtake volumes lasted the rest of FY24, with volumes sold at a lower price at a later date (e.g. US$2,000 a tonne or as low as US$1,000 a tonne), this would only have a net impact of ~A$72-145 million on IGO (before any offsetting impacts)

2. Greenbushes December 2023 quarter spodumene price reset to US$2,984 a tonne remains largely above the prices achieved by peers such as Pilbara Minerals, Allkem and Mineral Resources

Morgan Stanley: ‘Most headwinds priced in’

“After the strong move lower today, we now view most of the risk factors that have kept us Underweight as priced in,” said Morgan Stanley analysts. 

They add that several risk factors such as higher capex, a slower ramp-up at Kwinana, pricing issues and poor performance of nickel assets have largely already played out.

Putting it all together

Here are my three key takeaways from the three broker reports. 

• Plenty of IGO’s risks have materialised over the past 2-3 quarters and that’s been reflected in the stock’s ~43% correction from November 2022 highs.

• A new pricing mechanism (from more beneficial lagged pricing to more forward-looking pricing) could change the earnings outlook for worse.

• Greenbushes is the lowest cost Australian spodumene producers and solid free cash flow yields of 5-8% over the short-to-medium term. 

Despite the optimism, can the share price stabilise after falling for six of the past eight weeks? Or will we see a Resmed (ASX: RMD) like scenario – a stock that’s continued to spiral lower despite upbeat views from brokers.