Investors Remain Attached To IGO’s Lithium Story

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A mixed bag from IGO’s first quarter update, with strong production from Greenbushes somewhat overshadowed by a significant capital expenditure upgrade for Cosmos. 

-Strong quarterly production was led by an impressive result from Greenbushes
-Updates on Cosmos project and associated capital expenditure largely disappointed
-Lithium pricing provides upside potential 

By Danielle Austin

A strong start to the year saw IGO ((IGO)) report record quarterly spodumene production from its Greenbushes project of 361,000 tonnes, while group earnings lifted 54% quarter-on-quarter to $396m. Greenbushes is expected to deliver a similar production and cost performance in the December quarter, while costs are likely slightly higher at Nova and production higher at Forrestania. 

Less pleasing to analysts was an update on the Cosmos project, and a sizeable increase to the capital expenditure forecast when the asset was acquired. Total expenditure for the project now looks set to reach $810m, double initial estimates and leaving a $400-425m spend in FY23. 

A revised development plan for the project includes an expansion of the processing plant to 1.1m tonnes per annum from 0.75 tonnes, as well as modification works to the shaft and further mine development to support a higher mining rate. First concentrate is anticipated in the first quarter of FY24.

Lithium outlook allows investors to overlook cost increase

While analysts largely agreed that Greenbushes performance was the highlight of the quarter, outlooks present a more mixed bag. Three equivalent Buy ratings, one Neutral and two equivalent Sell ratings were offered from database brokers, with an average target price of $15.06 ranging from $10.50 to $20.00.

First quarter production was a sizeable beat to Macquarie’s (Outperform, target price $20.00) assumptions. Spodumene production from Greenbushes beat expectations by 14%, while nickel and cobalt from Nova beat by 5% and 3% respectively. This broker found IGO’s first quarter strong, and the financial performance solid. 

Credit Suisse (Outperform, target price $16.50) flagged that only 80% of spodumene sold in the quarter achieved the pre-set chemical price, and while it anticipates the December quarter will be better it expects technical grade will continue to drag on realised prices. 

Citi (Neutral, target price $15.20) liked that earnings from Greenbushes more than doubled quarter-on-quarter, and that net debt reduced -$137m to $396m in the period. However, Citi assumes nickel prices will decline and lithium prices will remain steady in the near term. With the stock price lifting 16% in the last six months, and the broker taking a cautious view on nickel pricing, Citi sees better value elsewhere in the lithium sector. 

While describing Greenbushes as the world’s best spodumene mine, UBS (Neutral, target price $15.70) finds downstream processing still coming together. The broker expects the setting of second half spodumene pricing will prove a key upcoming announcement for the company. Although UBS recently downgraded its rating, it did so given the share price is approaching its target price. 

At the other end of the spectrum, Morgan Stanley (Underweight, target price $12.45) found the sizeable increase to capital expenditure for Cosmos hard to overlook, anticipating it will drive a significant hit to net present value. Ord Minnett (Lighten, target price $10.50) similarly described the increased expenditure as an explosive cost blowout, but also noted investors seem willing to overlook risk given the lithium business cash generation.

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