Kidman Resources shares hit an all-time high of $1.13 yesterday — but they could go up by another 50 per cent if one optimistic forecast is correct.

Analysts at Hartleys, a Perth-based stockbroker firm, reckon the WA-focussed gold explorer with a big side bet on lithium is heading for $1.71 largely because of its half stake in the potentially world-class Earl Grey joint venture with Chile’s lithium giant, SQM.

Not well understood by investors, the Earl Grey deal has been poorly explained by Kidman which won control of the lithium deposit about 100 km south of the WA wheatbelt town of Southern Cross after a bruising legal challenge from a rival explorer, Marindi Metals.

Within days of convincingly beating Marindi to the prize, Kidman (ASX:KDR) revealed its arrangement with SQM, a deal which some investors saw as a negative because it involved selling a 50 per cent stake in Earl Grey when they preferred 100 per cent.

Part of the promotion of the sale involved trying to convince the market that 50 per cent of a really big development was better than 100 per cent of a small mine.

But in doing that it also looked like any profits would be five years in the future rather than two years away.

Shares flatline after announcement

Confusion over the arrangement with SQM — which is one of the world’s biggest lithium producers — saw Kidman’s shares flatline at around 55c for weeks after it was announced.

That lack of positive response was despite the promise of becoming a half-owner of a project that could be much more than just another mine digging and delivering spodumene ore upgraded to a 6 per cent concentrate.

That’s because SQM has the technology to take lithium all the way to its hydroxide or carbonate form — the high-value material needed by battery makers.

Investors got a better understanding of what’s proposed last week when Kidman released a scoping study into Earl Grey with a clearer explanation that it was a two-stage project with the first stage being dig-and-deliver and the second, value-added stage, to follow.

Construction of the spodumene export phase could start in fewer than 12 months with first production roughly a year later.

Market still confused

Unfortunately for some investors in Kidman the initial reaction of the market was still confused — perhaps because of the lingering uncertainty over the project development process and the role of SQM and its Spanish speaking management which might have resulted in a “lost in translation” event, or because SQM has what might be called “interesting” lineage.

Whatever the explanation, what should have been a red-letter day for Kidman last Tuesday when the scoping study was released became a dog day with the stock falling 8 per cent from 97c to 89c.

Kidman did not regain its price before the release of the scoping study until Friday — perhaps with the aid of the Hartleys report.

The broker saw something that could have eluded investors — Kidman’s position as a fully-funded, 50 per cent partner in a major lithium project which will cost less to develop than first expected ($148 million versus $190 million), and deliver a 6 per cent spodumene concentrate for export at a cash cost of $US205 a tonne.

With the long-term price for the concentrate assume to be $US685/t, the first stage of Earl Grey should be handsomely profitable with the project generating an internal rate of return of 57 per cent — perhaps more because that long-term price estimate is well below the current spot market price for lithium concentrate.

Increased valuation

Hartleys, which is a financial adviser to Kidman and owns shares in the company, likes the idea of Kidman becoming involved in a lithium refinery because of the way it captures value lost to dig-and-deliver miners.

“We have increased our valuation [of Kidman] considerably by incorporating the refinery into our model,” the broker wrote in a report headed: ‘Scoping study very robust, Kidman is fully-funded’.

In fact, Hartleys has gone much further than simply tipping a future Kidman share price of $1.71.

The broker has run the numbers to demonstrate that the stock has a theoretical value of $4.87 using the spot-market price of lithium and after incorporating a 50 per cent stake in the proposed lithium refinery.

“Clearly, commodity price assumptions are very important,” Hartleys says in what must be one of the understatements of the year.

Whatever Hartley’s relationship with Kidman, there are four important points for investors to consider:

  • The company has not succeeded, yet, in providing a crystal-clear explanation of how the development of Earl Grey is likely to proceed, especially the timing of stage two, the refinery stage.
  • When that happens, the market will develop more comfort with a project that could become one of the world’s major sources of lithium.
  • SQM is not a well understood company, perhaps because it was once closely allied to Chile’s military dictator, Auguste Pinochet, who is the late father-in-law of SQM’s former chairman, Julio Ponce; and
  • As SQM shakes off the baggage of its unfortunate history it should become clearer to Kidman investors that they have a New York-listed partner which is a true global lithium leader keen to expand into Australia, bringing with it world’s best lithium processing technology.