Liontown Resources: Going Underground

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Focus is turning towards the ramp-up of Katheen Valley and potential funding hurdles post in-line interim results from Liontown Resources

-In-line interim and steady guidance for Liontown Resources
-Key Focus: Kathleen Valley ramp-up and underground mining
-Outlook for the price of lithium remains all-important

By Mark Woodruff

The focus for hard-rock lithium producer Liontown Resources ((LTR)) following in-line interim results is now largely on the Kathleen Valley lithium project in Western Australia and the transition to underground from open pit mining over 2025.

At the half-year results, management maintained second-half guidance and released a Board-approved capital allocation framework.

Capital will first be allocated to sustaining operations at Kathleen Valley. Morgans notes additional priorities include growth through Kathleen Valley expansion or M&A, debt management, and shareholder returns via dividends or buybacks.

In early-February, UBS had already upgraded its rating for Liontown on an improved production and cost outlook following management’s operational update, which increased the broker’s confidence in the project ramp-up profile over FY25-27.

Given Kathleen Valley’s performance so far is generally tracking ahead of expectations, the Board has confidence to declare commercial production for the processing plant effective January 1, 2025, meaning all operating costs including processing plant depreciation will now flow through the P&L statement.

Kathleen Valley will be the first large-scale, spodumene-focused underground mine globally, and hence, not without risk, points out Jarden, though early signs are labeled as “encouraging”.

Significant off-take agreements for spodumene concentrate have already been secured with major global players in the electric vehicle (EV) battery supply chain, including Tesla, Ford, and LG Energy Solution.

The mine, which produces high-quality spodumene concentrate with a lithium oxide (Li2O) content of approximately 6% to meet the demands of global battery manufacturers, has been in ramp-up phase since first production in the second half of 2024.

Management is simultaneously developing the Buldania lithium project, also located in Western Australia, and is also exploring potential for downstream processing to produce higher-value lithium products, such as lithium sulphate and battery-grade lithium hydroxide. 

Pleasingly, highlights Jarden, plant availability and overall recoveries at Kathleen Valley, have continued the overall rising December-half trend into the March quarter.

Plant availability has remained above 90% with increasing periods of sustained operation, noted management on a post result earnings call with analysts, while the 64% overall recovery rate in February included periods where rates verged on 70%.

Liontown is targeting the March quarter of FY26 to achieve 70% recoveries and is aiming for the feasibility study estimate of 78% thereafter.

Cash Remains King

Bell Potter forecasts Liontown is fully funded until its operations achieve free cash flow. Along the way, Ord Minnett expects FY26 will be a transition year with higher unit operating costs, potentially leading to cash burn exceeding -$100m.

Period-end cash was $193m and debt $698m including a $300m funding facility with Ford, and a US$250m convertible note with LG Energy Solution, both Kathleen Valley off-take partners.

Management highlighted several liquidity options, noting progress sourcing up to $100m in additional debt capacity, as well as operational cost reductions.

Jarden forecasts short-term liquidity tightness, somewhat countered by its view that lithium prices have bottomed.,

Regarding cash flows, Liontown has previously spent to build-up around 1.3mt of run-of-mine (ROM) ore to sustain production between the transition to underground mining from open pit mining, explains Morgans.

As the broker’s commentary, a recently revised mine plan provides the company with optionality in the current low-priced environment and prioritises high-grade product.

Risks remain, however, to near-term liquidity and funding if lithium prices remain at current levels, notes Morgans, as management is required to begin re-paying its Ford debt facility from declaration of commercial production onwards.

Interim Results

Liontown announced first half FY25 revenue of $100m, underlying earnings of $66m and a loss of -$15m from 92kdmt spodumene concentrate sold.

Management made the decision to capitalise all costs related to the Kathleen Valley ramp-up and recognise a nil gross profit margin in the first half.

Underlying earnings (EBITDA) of $66m exceeded expectations due to the capitalisation of excess costs, and a net loss of -$15.1m was recorded.

Underground costs will continue to be capitalised until underground commercial production is achieved later this year.

Outlook

Bell Potter posits Kathleen Valley remains highly strategic in terms of scale, long project life and location in a tier-one mining jurisdiction.

Neutral-rated Jarden highlights commodity price movements remain critical to Liontown’s prospects at this stage, along with additional uncertainty on the ramp-up of underground mining and understanding the true long-term variable and fixed unit costs.

Presumably because lithium is not exactly flavour of the month, Macquarie and UBS are yet to update for Liontown Resources’ interim result, which leaves four up-to-speed daily monitored brokers in the FNArena database.

From these four, Bell Potter has a Speculative Buy rating; all others prefer to sit on Hold, with an average target of 79.5 cents, heavily impacted by by Bell Potters’ $1.25 target. Most price targets are sitting within the 60c-75c range.

Liontown shares closed at 74c yesterday.

Outside of daily coverage, Neutral-rated Jarden and Goldman Sachs did update post interim-result with an average target of 68 cents.

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