IGO's Nova nickel mine goes down: Macquarie says buy the dip

IGO (ASX: IGO) shares are down around -8.0% so far this week after a fire incident at the Nova nickel-copper-cobalt mine may suspend operations for approximately two to four weeks.

The Nova operation generated $631 million in FY22 earnings or 88% of Group earnings. The weighting from Nova is expected to change heading into FY23 as IGO recognises contributions from its lithium projects Greenbushes and Kwinana.

On Monday, IGO announced that its Kwinana Lithium Hydroxide Refinery had hit commercial production status. The company said that the completion of 'Train 1' enables the project to "operate continuously and produce battery-grade lithium hydroxide."

Still, taking a cash generating project offline for up to a month could contribute to a small dent in FY23 earnings and that headwind has been reflected in IGO's recent share price performance.

Macquarie tweaks FY23 earnings

"We have updated our nickel production and cost assumptions to reflect the fire at Nova power station," Macquarie analysts said in a note on Monday.

"We cut FY23e earnings per share by 1% while our estimates for FY24e and beyond remain largely unchanged."

The investment bank reaffirmed an Outperform rating with a 12-month target price of $21.00.

Key catalysts for IGO

Macquarie said the progression of Train 1 the Kwinana Lithium Hydroxide facility was a key milestone for the company. The new facility now seeks to ramp up production and explore potential offtake agreements with customers in the lithium-ion battery industry.

"We note that Kwinana produced 195t of lithium hydroxide in the 1QFY23 and we assume total production of just 1,600t in FY23," the analyst said.

In addition, updates on the Nova project was viewed as a potential catalyst for IGO shares. The analysts expect the impact to linger into early 2024 and 'resume at a reduced rate in a few weeks'.

IGO chart at a glance

IGO shares have plateaued since early October after rallying more than 80% from July lows. The low was broadly in-line with the ASX 200's bottom on 21 June.

What's interesting is that the ASX 200 rallied strongly between June and late August, before revisiting those June levels in late September. Despite the broader market going full circle, IGO experienced a mere 10% pullback in late September, before powering ahead.

Now, after an extraordinary run, its price action is getting a little choppy, with the Nova incident adding further weakness to its share price.

IGO chart (Source: TradingView)