Ground Breakers: IGO warns of lithium headwinds as Gina's cloud obscures Azure skies in lithium takeover

Greenbushes owners consider production curbs after lithium market softness bites
IGO banks record quarterly dividend from its 24.9% share of the world’s largest lithium mine, but warns of price volatility
Clouds form over SQM’s Azure bid as Gina Rinehart again runs interception

IGO (ASX:IGO) has warned its spodumene earnings will take a hit in the December quarter as demand for lithium in China softens, flagging a potential decision to curb output at the world’s largest lithium mine.

It banked a record dividend from its 24.9% stake in the Greenbushes mine, the largest hard rock lithium operation in the world, in the three months to September 30.

IGO pulled in a remarkable dividend of $578 million from its share in the Greenbushes JV, clocking in at over 25% of the sale price for its half-stake in Tianqi Lithium’s 51% share of the mine near Bridgetown in WA’s South West revealed in late 2020.

That translated to record underlying free cash flow of $530m, up 39% QoQ, even as underlying EBITDA fell 42% QoQ to $362m as its nickel operations at Nova and Forrestania hit turbulence.

While spodumene sales out of Greenbushes rose 5% QoQ to a record 414,000t, pulling unit production costs down 3% to a sector low $262/t, nickel production fell 25% on the quarter to 7131t.

But this quarter’s earnings may well be as good as it gets. IGO has warned of volatility in the lithium market, with its TLEA JV with Tianqi electing not to take its full entitlement of spodumene from the Greenbushes mine in a sign the physical market in China is softening.

It comes after other lithium market players like Mineral Resources (ASX:MIN) and Pilbara Minerals (ASX:PLS) fingered paper trading and small parcel sales respectively for chilling spodumene prices, which have fallen around 75% on spot levels from last year’s highs of more than US$8000/t.

“As has been widely reported, the lithium market has been highly volatile in recent months, with softening demand, falling lithium chemical prices and inventory building across the supply chain,” IGO said.

“IGO expects this volatility will be near term and that the fundamentals of the lithium market remain strong over the medium to long term.

“As a result of current market conditions, TLEA has elected to not take its full entitlement of spodumene concentrate production from Greenbushes for the December quarter. This lower election reflects the lower product volume requirements of IGO’s joint venture partner, TLC.

“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. The unallocated concentrate volumes will be stockpiled at Greenbushes and be available for future sales.”

Chemical grade spodumene pricing will still be strong in the December quarter, with a lagging price mechanism making higher prices on the way down a trade off for a slower capture of upside on the way up. That has been set at US$2984/t between October 1 and December 31, down from US$3740/t in the September quarter and US$5431/t in the June quarter, though margins remain upwards of 90%.

Those price lags pose a problem for Tianqi and Albemarle, who are selling into a weakening lithium chemical market, where prices have fallen from US$80,000/t late last year to the low US$20,000/t range in Asia.

Speaking to analysts today, acting IGO CEO Matt Dusci said negotiations were continuing over how to deal with short term volumes. Selling stockpiled material on spot would be highly profitable for IGO, but its priorities may clash with its JV partners who refine their own offtake.

Greenbushes guidance could be cut

Greenbushes is expected to produce a record 1.4-1.5Mt in FY24, though the owners of the operation, which also include the world’s largest lithium producer US giant Albemarle, are considering cutting output in response to lower demand in the second half of the year.

“The shareholders of Windfield (the holding company of Greenbushes), TLEA and Albemarle Corporation, are currently considering their intended offtake volumes for the March 2024 quarter and are discussing arrangements to manage any surplus production volumes in the future,” IGO said.

“If market conditions remain challenged, shareholders may request volumes which are below forecast production at Greenbushes. In the event that the shareholders are unable to agree arrangements to manage surplus production volumes, it may be necessary to reduce production at Greenbushes during the second half of FY24.”

Meanwhile, IGO said it still expects to hit 50% of production capacity at its 24,000tpa Kwinana lithium hydroxide JV with Tianqi after increasing output 327% QoQ at the new downstream processing facility to 607t in the September quarter, 500t of that battery grade.

But it warned the plant, which lost $106.6m in the quarter, is still running below expectations. A longer than expected shutdown and slow ramp-up gave a sense of the challenges facing IGO and Tianqi, who are planning to complete a FEED study on a second train by mid-2024.

“While this result marked an improvement on the prior quarter and included several daily run-rates of over 35% of nameplate, the overall plant output remains below expectations, with 1Q24 operations interrupted by several blockages and materials handling issues that resulted in extended downtime to allow remedial works to be completed before operations could resume,” IGO said.

Cost blowouts on Train 1 could be reported when an updated budget is available in January, with IGO saying its capex remains unchanged but will be revisited once the board has approved its 2024 calendar year spending.

In its nickel division, IGO said $106m was spent evenly on mine development and project capital at the Cosmos nickel project, the main subject of a ~$1 billion writedown on the value of the assets acquired in a $1.3b purchase of Western Areas last year.

Commissioning of the Cosmos plant will start in the coming weeks with a project review ‘nearing completion’. A study meanwhile on a nickel sulphate and pre-cursor JV with Wyloo Metals, owner of the major Kambalda nickel mines, is due in mid-2024.

IGO shares were down almost 6% early doors, with Pilbara Minerals (ASX:PLS), Allkem (ASX:AKE), Core Lithium (ASX:CXO) and MinRes (ASX:MIN) also in the red.

Ground Breakers share prices today

Could Gina pull another swifty at Azure?

Gina Rinehart has emerged as a more than 18% holder at Azure Minerals (ASX:AZS), sending the attack dogs at Euroz Hartleys out to hoover up shares in the lithium explorer virtually as soon as SQM announced a $3.52 per share offer to acquire the one-time micro cap in a scheme bid.

That offer was supported by 10.8% holder Wilhelm Zours’ Delphi Group and Azure’s board. But the position of 13% holder and 40% owner of its flagship Andover project in the Pilbara, prospector Mark Creasy, remains a mystery.

It means SQM will likely need to resort to a fallback option written into its $1.63b bid with Azure, a conditional off-market takeover offer for $3.50, which would enable SQM to build a controlling stake in Azure without securing the support of over 75% of shareholders.

SQM operates major lithium carbonate brines on the Atacama Salar in Chile and holds a half stake in the Covalent Lithium JV with Wesfarmers incorporating the Mt Holland lithium mine near Southern Cross and a future lithium hydroxide plant in Kwinana.

It has shown its hand, however, when it comes to its desire to expand in the WA market, with questions surrounding the lengths the Chilean Government will take to try increase its benefit from SQM’s operations.

SQM originally took its near 20% stake in Azure at the start of the year. That was before a major lithium discovery in June, which put Azure on the map with an exploration target now set at Andover of 100-240Mt at 1-1.5% Li2O.

A resource of that size and grade would be among the largest Tier-1 resources in the world, certainly if it can be achieved in a maiden estimate due in the March quarter next year. SQM has taken stakes or formed exploration JVs with other early stage plays in WA and Victoria, including a ~$3m investment in unlisted Pirra Lithium announced last week before its Azure offer was officially tabled.

Rinehart’s Hancock Prospecting memorably stymied a $3 per share bid for Liontown Resources (ASX:LTR) from Albemarle, worth around $6.6 billion, after acquiring a 19.9% stake in the Kathleen Valley mine owner on market at or just below $3 in a $1.3 billion interception.

The US giant walked away, with Liontown forced to raise $376 million in equity at $1.80 off the back of it. It leaves questions over what Hancock’s eventual role will be in the development of Kathleen Valley, expected to open in mid-2024 with an initial production capacity of over 500,000t of spodumene concentrate a year.

Mineral Resources and its billionaire boss Chris Ellison, which has worked in tandem with Hancock on iron ore infrastructure in the Pilbara and has significant operating experience in lithium, is known to be another aggressive acquirer of resource stage lithium explorers and developers.

Azure shares are up around 1430% on the start of the year, with the SQM bid set to crystallise a massive gain for investors who stuck by Tony Rovira’s explorer as it shifted from drilling for Mexican silver to nickel and eventually lithium hunting in WA.