Ground Breakers: Careful what you wish for in lithium boom, IGO boss says

IGO boss Peter Bradford tells investors and analysts calling for lithium miners to be more exposed to high spot prices to be ‘careful what you wish for’
Battery metals miner to pay 5c divvie after $331m profit
Gold Road nets almost $40m in profit and doubles dividend after record half-year at Gruyere

IGO (ASX:IGO) boss Peter Bradford has sounded a note of caution to investors who think lithium prices will remain at record highs forever, saying “none of us have a crystal ball”.

The battery metals miner reported a 40% drop in net profit after tax to $331m in FY22 from $549m a year earlier despite increasing its revenue and underlying EBITDA 34% and 51% respectively to $903m and $717m.

The company will pay a 5c per share dividend, with $367m of cash and $900m in debt on the balance sheet after its ~$1.3 billion cash deal to acquire nickel miner Western Areas.

But the FY21 profit was largely buffeted by a one-off $385m gain from the sale of its 30% share in the Tropicana gold mine to Regis Resources (ASX:RRL).

On an operational level IGO’s business was $214m better off on the back of rising demand for battery metals, with higher nickel and cobalt prices, and the first dividend from its 24.99% share of the Greenbushes lithium mine, which delivered $177m in net profit even after $41m in EBITDA losses from the commissioning of IGO and Tianqi’s new lithium hydroxide plant in Kwinana.

IGO paid $1.9 billion for its stake in Greenbushes and the lithium hydroxide plant, but has arguably failed to see the full benefit of the investment thanks to its JV partners Albemarle and Tianqi’s conservative pricing strategy, which lags the spot price.

It means the JV has seen far lower prices than smaller miners like Allkem (ASX:AKE) and Pilbara Minerals (ASX:PLS), who sell closer to the ~US$6500/t spodumene spot price.

Careful what you wish for

Yesterday, MinRes (ASX:MIN) boss Chris Ellison predicted five to seven years of strong lithium pricing, saying he wanted to be exposed to spot for as long as record prices continue.

Asked about transitioning to spot pricing by analysts today, IGO MD Peter Bradford said the lag mechanism under which its lithium is sold would support its operations in the event of a downturn.

He said he couldn’t say whether the JV’s sales strategy would change going forward.

“I just don’t want to provide any conjecture around what that (sales strategy) may or may not be and given where spodumene prices are maybe it’s a scenario where you need to be careful what you wish for,” he said.

“If you take a view on whether suddenly prices might be at the top of the cycle, then a formula with a lag gives us a stronger price for longer.

“But none of us have the crystal ball that will tell us where we are in that cycle for spodemene and whether there’s more opportunity in front of us.

“So back to what I said at the start, there’s really no clarity or granularity I can give you on what their pricing formula may look like going forward.”

Lithium prices crashed infamously between 2018 and 2020, putting a number of mines out of business after a dramatic expansion in Australian hard rock exports oversupplied the market.

But it has rebounded fast to historic levels since the start of 2021 as EV battery production has outpaced expectations, with chemical prices trading at over US$70,000/t in recent months.

Meanwhile, IGO has increased its exploration budget for FY23 to $75m, with Bradford saying more focus will go into brownfields exploration to try extend the life of the ageing Nova and Forrestania nickel mines, where major new discoveries to add to the mine life have been hard to come by.

IGO (ASX:IGO) share price today:

Gold Road strikes a positive note with record earnings

Gold Road Resources (ASX:GOR) will double its half-year dividend to 1c per share after the Gruyere gold mine owner posted record $100m half-year earnings for the first time.

That figure was nearly double the $59.6m generated in H1 2021, firing GOR to a net profit after tax for $39.9m.

“The six months to 30 June 2022 has been a successful one for Gold Road, despite the challenging global operating environment. Gruyere achieved record production for the half year in line with our outlook of growing production through 2022 and 2023,” GOR boss Duncan Gibbs said.

“The record gold production resulted in strong free cash flow for Gold Road and a record net cash position.”

Subsequent to the end of the June quarter, GOR proposed to increase its stake in De Grey Mining (ASX:DEG), initially acquired in its all scrip takeover of DGO Gold, to almost 20%, signalling Gold Road’s interest in a potential acquisition of De Grey’s world class 8.6Moz Hemi discovery.

“The successful completion of the DGO Gold Takeover in June now provides Gold Road with an even more exciting platform for growth,” Gibbs said.

At the time Gold Road said it viewed the De Grey holding as a long term investment and did not plan to make a takeover offer, but reserved the right to do so at any time.

Gold Road, which turned over a record $196.5m in revenue in the first half of 2022 and is debt free with $160.3m of cash and short term deposits in the bank, expects to net half of the Gruyere gold mine’s guidance of 300,000-340,000oz at $1270-1470/oz in 2022.

The mine, half-owned by South African gold giant Gold Fields, is slated to hit a run rate of 350,000ozpa by 2023.