Monsters of Rock: Investment bank sticks sell label on Liontown after Albemarle exit, Genesis on track with Dacian and early quarterlies

Goldman Sachs issues sell rating on Liontown but lifts price target as Albemarle deal falls over
Genesis takes just one day to clear biggest roadblock to complete Dacian takeover
Syrah, AIC Mines and Newcrest report September production

Liontown Resources (ASX:LTR) shareholders are faced with a tough decision coming out of Albemarle’s abrupt but predictable exit from a deal to buy the Kathleen Valley mine owner at $3 a share.

As Gina Rinehart and her Hancock Prospecting’s interjection mopping up a 19.9% stake posed an insurmountable object to Albemarle’s planned $6.6 billion takeover, which would have required a 75% yes vote to enforce its planned scheme of arrangement, shares in the lithium hopeful quietly fell from around $3 to $2.79 before the company put its shares in a trading halt before the open on Monday.

With Albemarle out of the picture, fundraising to ensure Liontown can complete its $951 million Kathleen Valley mine is now in full swing.

When it returns to trade, potentially with a discounted equity component in the present or foreseeable future, what will those shareholders who missed out on the Albemarle and Rinehart payouts do with their stock?

There is a version of reality where it all works out, lithium prices surge, the 500,000tpa mine performs to expectations and Liontown with Rinehart in its corner becomes another major alongside Pilbara Minerals (ASX:PLS), Mineral Resources (ASX:MIN) and the like.

In the interim, though, there is downside risk given the volume of the company’s dramatic 127% rise this year related to the Albemarle bid.

When Albemarle’s rejected $2.50 a share approach was first reported in March, Liontown’s shares surged from $1.53 to $2.57 in a day. They hit a peak of $3.15 on June 16 and have traded in and around the $3 mark since Albemarle returned with an offer at that level in early September.

Goldman Sachs, which thinks Liontown will need $150m of corporate debt on top of an announced letter of support for $300m from the export credit agencies of Korea, the US and Australia, has labelled Liontown a sell with a price target of $1.85 per share.

What’s behind it?

Analysts Hugo Nicolaci, Paul Young and Elise Bailey think Liontown is valued at a major premium to lithium-producing peers, with a market cap implying a long-term spodumene price, on Goldman’s numbers, of US$1600/t, against a peer group average of US$1100/t.

That is with some growth potential bubbling in the background.

“We note our estimates already included a bring forward of the planned expansion, additional resource conversion for an extra 5 years mine life to ~FY50E, and a nominal value for growth options/mid/downstream/future exploration upside (noting an unrisked LOM downstream hydroxide plant scenario adds ~A$1bn to our valuation),” GS’ Aussie scribes say.

At the same time, they have lifted Liontown’s 12-month price target – a virtual moot point while Albemarle’s was in due diligence before pulling the pin yesterday, 37% to $1.85 per share from $1.40.

Spodumene currently trades on spot at US$2150/t according to Fastmarkets (for 6% Li2O concentrate), well above Goldman’s long term forecasts. The bank is, infamously, a lithium bear, with a real 2027 long-term spod forecast of US$1000/t.

“We note on a lift in our LT spodumene pricing to US$1,500/t our NAV lifts from A$1.65/sh (of which ~A$1/sh is Kathleen Valley) to A$2.83/sh (A$2.2/sh KV), though note LTR already trades at a significant premium to peers,” Nicolaci et al said.

Goldman thinks it will take Liontown until 2028 to return to net cash, with Kathleen Valley expected to begin shipping concentrate in mid-2024.

Short interest in Liontown – that is bets on a fall in the share price – is currently around all time highs.

But where it heads next will only be revealed once its funding package is sewn up and trade resumes.

Liontown Resources (ASX:LTR) share price today

Light work

Sunday has come early for Genesis Minerals (ASX:GMD), which has taken less than a day clearing the biggest road block to its acquisition of all of Dacian Gold (ASX:DCN).

Kin Mining (ASX:KIN) and German investor Wilhelm Zours have drawn a big premium from hitting the Dacian stone, taking the spoils after engineering a ploy to get Genesis to up its offer for the Mt Morgans gold mine owner.

Genesis has sat for most of the year at around 80% ownership of Dacian, which it wanted full control over to complete a consolidation play bringing together it and the Gwalia gold mine near Leonora into a single district scale portfolio.

After securing the support of Ed Eshuys ahead of its 23.5c per share all scrip bid, it now has the blocking stake controlled by Kin and Zours’ Deutsche Balaton committed to the offer.

That will enable Genesis to hit the 90% threshold to compulsorily acquire all the shares in Dacian.

It all worked out pretty well for Kin, which acquired its 7.34% holding for $10.7 million last year. Its take from the second Genesis offer will be worth $20.9m in Genesis shares.

If Genesis ups its stake to more than 95% before the November 17 closing date, Kin stands to pick up $24.1m, a $13.3m profit on the $10.7m it paid at around 12c per share in 2022.

The takeover offer is now unconditional and $1.5 billion listed Genesis and its influential MD Raleigh Finlayson can get on with the business of putting together a long-term strategy to be presented in the March quarter next year for its province-scale Leonora production plans, expected to target output of more than 300,000ozpa.

Genesis Minerals (ASX:GMD), Dacian Gold (ASX:DCN) and Kin Mining (ASX:KIN) share prices today

Rounding out reporting

It’s the first serious day of reporting season and Rio Tinto’s (ASX:RIO) impressive set of numbers was the lead today.

But a few producers put in decent supporting performances.

AIC Mines (ASX:A1M) was up over 13% after the small copper producer delivered 3402t of copper at all-in sustaining costs of $4.94/lb Cu in its strongest quarter since acquiring its Eloise copper mine in November 2021.

It sold 3360t of copper, 1906oz of gold and 34,545oz of silver, turning over $46.2 million in revenue, $19.2m of operating cashflow and $8.2m of new mine cashflow, leaving $29m of cash in the bank.

AIC also said it was in discussions for debt finance to develop its satellite Jericho mine, bought in a merger with Demetallica.

At the upper end of the market Newcrest Mining (ASX:NCM) saw its costs life 18% to US$1397/oz as production fell from 556,187oz of gold and 34,978t of copper in June to 454,312oz gold and 30,624t copper in September.

Not really the Cadia mine owner’s problem after Newmont sealed its takeover of Australia’s biggest gold producer last week. The US giant’s CDIs will replace Newcrest’s shares on the ASX on October 27, with Federal Court approval for the deal coming through today.

Newcrest expects its suite of assets, which produced at a much more frugal US$1187/oz in June and US$1092/oz in FY23, to deliver 2-2.3Moz gold and 120,000-140,000t copper in FY24.

Lastly, to Syrah Resources (ASX:SYR), which produced just 18,000t from its Balama graphite mine in Mozambique in the September quarter at costs of US$484/t during its operating period, but sold 23,000t to third-party customers at a weighted average sales price of US$528/t and shipped 4,000t to its Vidalia plant in Louisiana.

The company says demand for natural graphite in the medium to longer term is strong despite low prices cause in part by a ramp up of supply of natural and synthetic graphite in China.

“Domestic natural graphite production in China increased seasonally in the September 2023 quarter, resulting in reported natural graphite prices in China falling by ~20-30% since the beginning of 2023. However, increased demand has resulted in prices moving off lows observed late in the quarter,” Syrah told investors today.

“Benchmark Mineral Intelligence reports that domestic natural graphite producers are under cost pressure from a combination of lower grade ore, poorer recoveries and other factors, requiring prices to rise for profitability. Increased sales from previously warehoused stock, and the forthcoming domestic winter production shutdown are expected to improve the supply/demand position in Syrah’s favour.

“With cost exceeding price at a number of points across the anode supply chain, increased AAM demand, driven by recovering EV sales, will require higher prices to incentivise increased production, with higher natural graphite supply required from ex-China sources.”