Lithium On The Move

This story features NEOMETALS LIMITED. For more info SHARE ANALYSIS: NMT

-Two years of production sold
-First shipment in July/August
-Heightened demand for lithium
 

By Eva Brocklehurst

A binding agreement to sell forward 2016 lithium production from the Mt Cattlin mine has provided a relief valve for the project. This sale, worth US$36m, will provide a funding buffer to re-start the mine as the joint venture aims for 120,000 tonnes per annum of lithium concentrate production from 2017.

In addition, there is a binding commitment to purchase 2017 production, with pricing to be confirmed in the fourth quarter of 2016.

Canaccord Genuity welcomes the news as it comes as a timely source of funding for the joint venture partners to meet capital expenditure to refurbish the plant. Mt Cattlin is a spodumene mining operation in Western Australia with joint venture partners Galaxy Resources ((GXY)) and General Mining Corp ((GMM)).

The broker observes the US$600/t price tag for 2016 reflects the tight spodumene supply and this is likely to continue in the short to medium term. There are only two new mines likely to enter the market for lithium oxide in the medium term – Mt Cattlin and Neometal's ((NMT)) 280,000tpa Mt Marion project.

Hence, the broker revises previous concentrate price forecasts, expecting prices to peak at US$725/t in 2017 before moderating to a long-term price of US$600/t from 2019. Total 2016 production from the mine is expected to be a minimum of 65,000t.

An uplift in pricing assumptions and the improved production outlook for Mt Cattlin has increased the broker's price target for General Mining Corp to 60c a share. A speculative Buy rating is maintained. Galaxy Resources is also rated speculative Buy with the target raised to 30c.

The offtake agreement is for 60,000t of lithium concentrate to be delivered in 2016 to two Chinese buyers. A product pre-payment of 50% of the order value (US$18m) is to be paid in cash by the end of March and likely to be evenly distributed to both parties. The broker had not previously assumed a large pre-payment, or that 50% would flow direct to Galaxy Resources.

Any additional funding into Galaxy Resources should provide a welcome boost to working capital, the broker believes, as the company completes the review of the Sal de Vida lithium and potash brine project, Argentina, due mid 2016. This region is currently the source of 60% of global lithium production. Galaxy Resources is also involved in the James Bay lithium pegmatite project in Canada.

Canaccord Genuity makes adjustments to throughput rates from 2017 to 840,000tpa to account for an improved production outlook. The fines circuit is due for commissioning at the end of this month and this should be followed by the dry plant next quarter. First shipment is expected in July or August.

The sale of the lithium concentrate is directed towards converters in the lithium carbonate and lithium hydroxide markets. The companies intend for the balance of any additional and future production to be sold to a range of downstream converters, including lithium carbonate, lithium hydroxide and the cathode markets.

Galaxy Resources has observed demand for lithium products is sound. Lithium is an essential cathode material for long-life batteries used in electric vehicles and mass energy storage systems. Much of the increase in demand is driven by end user applications and heightened consumption in the transport sector.

China has set a target of 5m new energy vehicles to be on the road by 2020. Sales, Galaxy Resources maintains, are expected to be well in excess of 600,000 vehicles in 2016. Should this occur China is likely to surpass the US in terms of electric and hybrid vehicle sales.

Lithium is also used in the manufacture of ceramics, glass and consumer electronics.
 

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