Why Core Lithium could find itself in even deeper waters

It's crazy to think that 12-24 months ago, names like Core Lithium (ASX: CXO), Lake Resources (ASX: LKE) and Sayona (ASX: SYA) were viewed as the next generation of lithium producers.

The downturn in lithium prices and operational challenges has placed these companies in a death spiral of capital raisings, forced mine closures and management changes. Shares in Core Lithium, Lake Resources and Sayona are all down more than 70% in the past twelve months.

Core Lithium announced the departure of its Chief Executive Gareth Manderson on Tuesday, which coincided with a disappointing half-year result. The company reported an interim loss of $167.6 million, largely attributed to the 75% fall in lithium prices and $119.6 million of impairments associated with the decision to suspend mining at Grants.

"Core remains debt-free with a cash balance of $124.8 million at the end of the period. The Group has moved to reduce costs and preserve cash. Core will strictly assess capital allocation with the aim of emerging from the current market conditions in the best condition possible," the company said in a statement.

Recap of Events

On 5 January 2024, Core announced the suspension of mining at the Grants open pit operation – The starter operation at the Finniss Project.

BP33 was the second proposed mine at Finniss, located 5km from Grants. Early works at BP33 was also suspended due to low lithium prices.

Although mining has been suspended, the processing of existing ore stockpiles to produce spodumene concentrate continues. The company had 289,000 of ore stockpiles as of 31 December 2023 and it is expected to take approximately 6 months to process this material.

Macquarie's forecasts from 24 January expect production at Finniss to resume around the March quarter 2025.

Source: Macquarie Research

The Kicker

The suspension of mining operations and sizeable impairments should come as no surprise given prior updates.

The section I found most intriguing from the half-year result can be found on page 25 under "Notes to the consolidated financial statements."

"The Group has offtake agreements with Ganfeng Lithium and Sichuan Yahua for the supply of lithium spodumene concentrate. Within these agreements, there are annual shipment quantities that Core Lithium is contractually obligated to meet."

"Due to the suspension of mining at the Finniss operations, there is a possibility that Core Lithium may not meet this obligation. In respect of one of these agreements, if this obligation is not met, Core Lithium is obligated to pay the customer the difference between the price and the price the customer actually paid in procuring a replacement supply of spodumene concentrate."

The details of the binding long-term offtakes include:

• Ganfeng: 300,000 tonnes of spodumene concentrate at 75,000 tonnes per annum over four years

• Yahua: 300,000 tonnes of spodumene concentrate at 75,000 tonnes per annum over four years

• Offtake pricing referenced to the market price for lithium spodumene concentrate, adjusted for actual lithium content and includes an agreed floor price

The half-year results announcements revised FY24 production guidance to 90-95,000 tonnes of spodumene and sales of 80-90,000 tonnes.

Core Lithium said it is working with its offtake partners to ensure their contractual obligations are met. In terms of potential liabilities, the company says it is currently difficult to predict any imminent payments and contingent on future events.

What does this actually mean? Soaring lithium prices could work against the company under a scenario where it fails to meet its contractual obligations. This could range from a tiny liability (e.g. lithium prices remain relatively unchanged and the offtake partners find replacement supply at similar prices) to millions of dollars (e.g. lithium prices surge, offtake partners struggle to find replacement supply and end up paying a sizeable premium).

Spodumene prices have somewhat stabilised in recent weeks, up to US$1,000 a tonne from lows of US$800 a tonne earlier this year.