Monsters of Rock: Wesfarmers already considering doubling production in lithium foray

Wesfarmers and SQM already studying a doubling of lithium production capacity at Covalent Lithium JV
GS still rates WES a sell as it faces headwinds in its chemical and fertiliser business
Materials crosses the finish line today up 0.03%

Lithium prices may be trending down in 2023, but they remain high enough to have producers both old, new and future thinking about ramping up production.

The owners of the Covalent Lithium joint venture, Wesfarmers (ASX:WES) and SQM, appear to already be looking at the ramp up of their over-budget, yet-to-open Mt Holland mine and Kwinana refinery.

An expansion from an initial capacity of 380,000tpa of spodumene concentrate to 760,000tpa is already being mulled, along with a potential lift in hydroxide capacity from an initial 50,000tpa to 100,000tpa at Kwinana.

At a combined capex of $2.6b, the Covalent Lithium JV is well over budget, with an update in February pushing the timeframe for first concentrate back six months to the first half of 2024, with first lithium hydroxide due H1 2025.

But that hasn’t deterred growth plans. The refinery is one of many potentially on the horizon for ASX listed miners, would be the third to open in WA after Tianqi and IGO’s (ASX:IGO) Kwinana plant and Albemarle and Mineral Resources’ (ASX:MIN) Kemerton.

Talk of expansion ahead of its opening gives a sense of how confident current and future lithium producers are of demand for their products amid the ongoing shift from ICE to electric vehicles.

Goldman still a sell on Wesfarmers, expects lithium prices to fall

Perhaps unsurprisingly, given their less than constructive opinion on lithium prices, it’s not convincing Goldman Sachs to give more than a sell rating on Wesfarmers amid a recent fall also in ammonia prices.

Analysts Lisa Deng, Darshana Nair Syama and James Leigh think a ramp up of hydroxide capacity could take longer than projected given the uncertainties and delays being faced elsewhere.

Their $42.70 price target was a ~14% discount on Friday’s close.

“WES announced a study into potentially doubling of Mt Holland capacity from 380ktpa to 760ktpa which if delivered would reduce mine life to ~25 years (from ~50). There is no specific date for a decision so it is not factored into our numbers,” they said in a note to clients.

“If spodumene refinery expanded, incremental capex would be lower than first tranche, as could partially leverage the existing infrastructure.

“Net, we don’t believe this trip, whilst good insight into the WESCEF business, changes our fundamental view 1) we are below consensus pricing of lithium assets with a valuation of ~$2.5b, 2) we believe FY23 represents peak profit for chems and fert business. Our forecast valuation and TP is unchanged. Remain Sell.”

Wesfarmers (ASX:WES) share price today:

Materials shifts up

The materials ended a dull session just above breakeven territory, up 0.03%.

Anyone hoping for fireworks after the Deutsche Bank sitch over the weekend would be disappointed.

The trading day for mining stocks proceeded with the emotional weight of a video about how hot dogs are made.

That said cake or not is a popular streaming concept nowadays, so maybe some boring palatable viewing was in order after some tumultuous trading sessions in recent week.

Goldie Northern Star (ASX:NST) was the large cap standout among the resources firms, up over 2% as gold prices threatened US$2000/oz.