Ground Breakers: Allkem sees no end to lithium demand as its mines become cash machines
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Lithium prices continue to defy Goldman Sachs’ infamous bear call with Chinese battery makers still willing to pay upwards of US$70,000/t to get chemicals for electric vehicles in a tight market.
That is delivering incredible margins to the miners, who despite recent bearish moves in their share prices, are about as profitable as ever in their short histories.
The latest to demonstrate the ATM style cash generation of the established lithium miners is Allkem (ASX:AKE), which despite some operational issues with grades, Covid, recoveries and stripping ratios at its Mt Cattlin spodumene mine in rolling in it like a pig in mud right now.
It produced a record 193,563t of spodumene concentrate at Mt Cattlin, located at Ravensthorpe on WA’s south coast, in FY22.
That included just 24,845t in the June quarter (37,8437dmt of shipments), but still generated record revenue of US$188.9m with a remarkable gross margin of 84% on average pricing of US$4992/dmt for spodumene at a grade of 5.4%.
That price is remarkable for a couple reasons. Firstly it is well over double the US$2178/dmt Allkem pulled in the March quarter.
Secondly, at 5.4% it is well below the benchmark 6% Li2O grade normally referenced in spot pricing.
Thirdly, revenue significantly outstripped the previous quarter’s US$143.8m on much weaker production.
Allkem’s Olaroz mine, which delivered a record 12,863t of lithium carbonate, 47% of it battery grade, produced 3445t of lithium carbonate in the June quarter, selling 3440t for US$141m in revenue on a gross cash margin of 90% at average prices of US$41,033/t FOB.
Prices for spodumene are expected to increase again in the September quarter, with carbonate to remain steady. Good cash if you can get it.
You may think so, but markets remain extremely tight with EV sales and registrations continuing to rise across the world, even with economic activity on the slide.
According to Allkem EV sales in the June quarter were estimated at 2.2 million units, 50% up on the same quarter in 2021.
China, where much of the urban population has spent the past quarter cooped up while Covid rages outside, saw an estimated 90% YoY increase to 1.3m sales.
Despite the closure of factories during the lockdowns EV battery installations were steady at 52Gwh in China, up from 29GWh in June 2021.
Allkem’s chief salesman Christian Cortes told analysts on a conference call this morning the lithium miners are still playing catch up with demand.
“Despite increased supply volumes from Western Australia during the quarter supply side tightness is still prevalent as there is strong demand from converters who need to source feedstock for the lithium chemical production,” he said.
“Everywhere, contracted prices for lithium carbonate and spodumene have gradually adjusted up to reflect the tight market conditions and we expect the gap between contract pricing and spot pricing to narrow over time.
“For the September quarter, we expect to see relatively stable prices in lithium chemicals, carbonates and hydroxide and a continued increase in spodumene prices, although not as much as what was experienced last quarter.
“Basically what is driving the demand is the growth in EV registrations, EV sales and this will continue. The lithium industry is trying to catch up with demand and the demand is so strong, that all the projects that are coming out are necessary to meet demand.”
Allkem shares were relatively steady, but lithium and critical minerals companies in general lifted the market this morning.
Northern Star Resources (ASX:NST) is the first major gold miner to report its June results.
And in its role as a domestique leading out the pack it has done a pretty handy job.
While the sector has been infamously flattened of late by volatile gold prices, falling sentiment and a flight to other safe haven assets like the US dollar, Northern Star has answered some key questions on performance, even as inflationary pressure has set in with MD Stuart Tonkin saying it has seen quotes by material suppliers and service providers ramp up by 5-20%.
NST hit its 1.55-1.65Moz guidance range for FY22, pulling in 1.561Moz at all in sustaining costs of $1633/oz after producing 402,000oz at $1650/oz and all in costs of $2204/oz in the June quarter.
That included a big improvement in volumes and costs at its previously troubled Pogo mine in Alaska. NST has also taken a conservative approach to FY23 guidance, expecting to deliver 1.56-1.68Moz at all in sustaining costs of $1630-1690/oz (down 8% on expected guidance issued last year), with growth capital of $650m and an exploration budget of $125m.
A strong second half has helped keep NST in a healthy net cash position of $528m, with cash earnings of $1.02-1.04b for FY22.
NST will also close the Jubilee Mill at its Kalgoorlie operations.
This year the fall in gold equities has outpaced the fall in commodity prices. Tonkin says the key to getting investors onside will be strong performance.
“It’s not for us to sit here and complain about what we think a fair price should be. Our job is really to run the business as best we can and articulate to the market where we see the best opportunity to keep those returns strong,” he said.
“We should be able to and will operate our business throughout those cycles. Does it mean growth plans get compromised, or does it mean margins get compressed over the longer term? I think we’ve got to not just stick on one set of rails.
“We’ve got to have a plan we’re following but continually assess those environments. I guess the question is what has to change to get the sentiment back? Delivery.
“I think in many cases in the gold sector at the moment, there’s a reset, and then it’s a consistent delivery against that.
“But at the moment, do people go to crypto? No. What are the alternatives or where are the surplus funds to be invested in the sector? I don’t see the flows at the moment really heavily moving into gold.
“When that changes or changes in a hurry, and that’s when you have a step change.”