There's only one lithium stock that generates free cash flows at today's prices

Lithium prices are back to selling off after a brief uptick last week. The most active July Guangzhou lithium carbonate futures tumbled 8.6% on Tuesday to 93,100 yuan a tonne and threatening to undercut recent lows of less than 80,000 yuan.

Citi analysts believe there's only one local lithium company that can generate free cash flows at current spot prices – IGO (ASX: IGO).

The World's Lowest Cost Spodumene Producer

IGO holds a 49% interest in the Greenbushes Lithium Mine via a joint venture with China's battery giant Tianqi Lithium.

Greenbushes produced 1.49 million tonnes of spodumene in FY23 at cash costs of A$244 a tonne and guided to costs between A$280-33 a tonne in FY24.

To add some perspective, unit operating costs (FOB Port Hedland and excludes royalties) for Pilbara Minerals were $613 a tonne in FY23.

But the status comes with a lot of extra baggage and risks. We'll highlight some of the challenges for IGO below.

Lower Production and Sales

IGO shares sold off sharply on October 30 after a downbeat September quarter update.

"As a result of current market conditions, Tianqi Lithium has elected to not take its full entitlement of spodumene concentrate production from Greenbushes for the December quarter ... The unallocated concentrate volumes will be stockpiled at Greenbushes and be available for future sales," the company said in a statement.

"As such, reported spodumene concentrate sales from Greenbushes in the December quarter are likely to be approximately 25% lower than forecast production for the quarter."

Why does this matter?

• Greenbushes has a pricing mechanism that lags current spot prices. Tianqi has pushed back on spodumene purchases, knowing it is cheaper at spot prices (i.e. Citi notes spot of US$1,590 a tonne vs. December quarter pricing of US$2,984 at tonne)

• The joint venture is currently working through the mechanism to sell volumes at spot prices

• Citi notes that a cut to Greenbushes production could balance the market. Citi models for a 30,000 tonne surplus in 2023 vs. Greenbushes output of 200,000 tonnes of lithium carbonate equivalent

• IGO reaffirmed 2024 lithium production figures back in October but Citi sees a growing risk that they may cut production in the coming months

No ESG Premium

The analysts noted Australian Foreign Entity of Concern (FEoC) guidelines as a potential cause for concern.

"The FEoC guidelines may be an overhang should it be enacted, i.e. TLEA would not receive any IRA-compliant pricing premium," the analysts said.

"At the time of the acquisition, IGO was of the view that Kwinana would receive an ESG premium."

Nickel Pains

IGO slashed the value of its two nickel mines by almost $1 billion in July 2023. The two miners were bought for $1.3 billion just over a year ago.

The company advised on Wednesday that its Cosmos Project will "transition to an ore trucking operation in the interim, rather than utilise a mechanised materials handling system as previously planned."

"As a result, construction on this part of the Project has been halted."

This goes against Citi's view that it is "unlikely that any tough decisions will be made shortly."

Putting it All Together

Problems are floating to the top amid a myriad of commodity price, inflation and operational challenges.

Citi analysts retained a Neutral rating for IGO with a $9.50 target price (down from $13.00). In a bull case, the analysts see 87% upside from current levels and its bear case forecasts just 4.1% downside.

The forecasts suggest IGO is entering deep value territory, but as it stands –There's no earnings or turnaround catalyst in sight.