Canada Unearthed: The lithium sale of the year could be on while heads are turned at WA

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Heads are turned squarely at the Pilbara, where a gridlock has formed around Azure Minerals (ASX:AZS).

With SQM, Gina Rinehart, Mineral Resources (ASX:MIN), Mark Creasy and Wilhelm Zours all sitting with big stakes on the register and Azure’s $4.10 share price well beyond the $3.52 offer floated by the Chilean giant, SQM’s bid could be — in Chris Ellison’s words — ‘dead in the water.’

How that plays out yet no one knows. But while that progresses, another deal could be completed very much under the radar for an asset that — unlike pre-resource Azure — is far advanced.

Earlier this year, TSX-listed Sigma Lithium (TSX-V:SGML.V) announced it was sounding out the market for interest in the company and its Grota Do Cirilo mine in Brazil.

The first major spodumene mine to open outside Western Australia, Sigma is trading at over C$4.5 billion and has netted all time gains of almost 2500%.

That strategic review process is close to complete, with Tesla reportedly mulling a bid at one point earlier this year.

But falling lithium prices have hurt market participants this year and Sigma is no exception, until a timely bump after the release of its first quarterly production report last week the company had nearly halved from all time highs of C$57 to a touch over C$30.

That was, at least in part, due to internecine warfare in court between boss and founder Ana Cabral-Gardner and her ex-partner and former company CEO Calvyn Gardner.

But the drop in spodumene prices would also have analysts and potential acquirers on notice ahead of the process’ expected closure at year’s end.

Grota not so grotty

At the same time, the first quarter’s performance at Grota has shown it has the potential to weather down periods in the lithium market cycle.

Grota has an obnoxious marketing name for its product — saying it will sell 130,000t of its “Triple Zero Green Lithium” concentrate through December having opened the Grota do Cirilo mine earlier this year.

Be that as it may, the real trick here is the cost base. Supported by cheap power, the mine operates at a cash cost of US$505/t and US$577/t FOB cost from the port of Vitoria with royalties out of the equation.

Sale prices were in the order of four times higher, with adjusted EBITDA of US$54.6m in the September quarter.

On revenue of US$97 million, that’s a 56% adjusted EBITDA margin with a net profit margin of 37%.

It was the first quarter of revenue for Sigma, which produced 38,823t of 5.7% Li2O spodumene at an average selling price of US$2488/t, delivering $36.4m in net income.

Its “Greentech Plant” has a total capacity of 270,000tpa, currently shipping 20,000t a month on a regular basis.

With much of its waste sold as ‘Green By-Products’, which attract around 10% of the concentrate price, one of the ways Sigma pushes its ‘triple zero’ moniker.

In the month of October, Sigma says its FOB costs have been just US$485/t. That compares well to ex-royalty all in sustaining costs at WA hard rock operations like Pilgangoora (US$489/t) and Wodgina (~US$600/t), though the ultra high grade Greenbushes mine is in a league of its own (~US$200/t).

So how likely is a sale?

Exactly what form the Sigma strategic review takes is uncertain.

But one thing Cabral says is not affecting it is the fall in spodumene prices, which at spot rates have tumbled from around US$8000/t late last year to US$1650/t in recent weeks.

She said the reality was that OEMs and battery makers were thinking multiple years in advance, looking at requirements for much larger EV penetration expected later this decade.

“They don’t think quarters, you don’t build a resilient business on a quarter-to-quarter basis,” she told analysts on a call last week.

“I’ll give you an example. When it gets to 2028, it isn’t like someone is going to appear two quarters earlier and say, oh, now I need to figure this out. I mean these discussions are happening now.

“Battery packs for Europe in 2026 is a reality and it affects battery makers all over the world.

“Cells made in China, cells made in Japan, cells made in South Korea, cells made everywhere are affected by it.

“There’s going to be a lot of lithium needed into the materialisation of the plan so some of these giga factories that have been announced and are being built all over or are operating right now (have enough).

“Ultimately, it’s 2024, practically speaking. So the plans for the remainder of this decade, which is a decade of lithium, are happening as we speak.”

Cabral-Gardner said Sigma was a ‘perfect target’ because it did not have a large strategic investor that could result in the interloping effect seen in recent M&A processes. That was, it seems, a wink at the role Rinehart played in scuppering Albemarle’s $6.6 billion bid for Liontown Resources (ASX:LTR).

She said the company, which plans to scale up to 500,000tpa and then 760,000tpa — around 100,000t lithium carbonate equivalent — meant it was “easily integratable for top line M&A synergies.”

The first productive quarter is a bargaining chip for Sigma, which Cabral-Gardner believes has proven at this stage the profitability of its mine even as lithium prices head lower.

TSX and TSX.V Winners & Losers

Here’s how TSX and TSX.V-listed mining and exploration stocks performed last week:

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