Tough Times For IGO

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Asset write-downs, production guidance cuts, processing issues – it’s been tough time for IGO amidst falling lithium and nickel price falls.

-More impairments for IGO’s nickel assets
-Cosmos into care & maintenance
-Lithium production downgrade
-No joint venture dividend

By Greg Peel

When IGO Ltd ((IGO)) acquired Western Areas in 2022 it brought together Australia’s two largest pure-play nickel producers. If we add in the stamp duty on the deal, IGO forked out -$1263m, picking up Western Areas’ Forrestania and Cosmos nickel projects to add to its Nova operation.

With the ambition of becoming a specialist in battery minerals, IGO had previously moved into the lithium space. In 2021, China’s Tianqi Lithium Corporation (51%) and IGO (49%) incorporated a new joint venture called Tianqi Lithium Energy Australia (TLEA).

TLEA’s assets in Western Australia are comprised of a 51% stake in the Talison Lithium Greenbushes Lithium Operation (49% owned by Albemarle Corporation) and 100% ownership of the Kwinana Lithium Hydroxide Refinery. This gave IGO a 24.99% stake in Greenbushes and 51% in Kwinana.

Note IGO changed its name from Independence Group.

2023 was a tough year in battery minerals land, with easing demand for EVs meeting raw mineral oversupply, as IGO was not the only kid on the block attempting to cash in on an anticipated EV explosion. Lithium prices, in particular, crashed, and things weren’t much better for nickel.

December Update

IGO’s FY23 result revealed the company had taken a -$968.5m impairment on Forrestania and Cosmos. Yesterday’s December quarter update flagged another impairment of -$160-190m. Moreover, having spent $392m since a review of Cosmos, IGO has now decided to place the operation in care & maintenance.

But wait, it gets worse.

As the minor party in the Greenbushes operation, IGO receives dividends from the JV. But not last quarter. TLEA decided last quarter to wait for the finalisation of its 2024 budget and operating plan, taking into consideration pricing and volumes. Brokers assume dividends will resume for the March quarter, although this is a “bull case”.

The Kwinana operation was shut down in December in an attempt to debottleneck Train 1, and could only manage a daily peak of operation at 44% nameplate capacity. Still of the view Train 1 issues are standalone, the JV is pushing ahead with front-end engineering & design (FEED) for Train 2.

If you were the IGO CEO you’d be tearing your hair out. But fortunately the CEO is new, carries no legacy of past decisions, and as Citi puts it, can “clear the decks”.

Work To Do

Jarden nonetheless echoes the views of other brokers in suggesting “we take a somewhat more considered (and optimistic) view that IGO is exposed to arguably the best lithium hard-rock asset globally [Greenbushes], which to date has provided reasonable disclosure and demonstrated unimpeded cash flow to the business.”

Macquarie points out IGO retains a strong balance sheet with cash of $276.4m and no debt, in addition to an undrawn $720m revolving credit facility.

As for nickel, UBS suggests IGO's strategy of becoming a diversified battery raw materials producer leaves it with some work to do. On this broker’s forecasts, Nova could still generate some $600m of free cash flow (undiscounted) over its remaining 2.5-year mine life, but attributing value beyond and optionality for a potential Cosmos restart is a little more difficult at this stage.

Jarden muses that with Indonesia growing its nickel supply, and BHP Group ((BHP)) also considering what to do with its WA nickel assets, the door may be open for a third part with a positive longer term view on nickel prices to consolidate a complementary group of assets.

Where will lithium prices go from here? A readjusted price mechanism for Greenbushes, shifting spodumene pricing from a three-month lag to a one-month lag, should reduce volume uncertainty, Evans & Partners suggests. But UBS notes Tianqi has built up some 300kt of spodumene inventory, 50% at the mine UBS assumes, and TLEA's own downstream at Kwinana is not creating any demand so sales and production could continue to be crimped by on-site stockpile capacity of 250kt.

Production guidance at Greenbushes has been trimmed, but global inventories continue to build at the start of the supply chain and UBS is not seeing enough material supply cuts to anticipate a recovery in prices yet, despite forecasting a 24% increase in EV demand growth in 2024.

Ratings Still Positive

IGO’s share price has fallen more than -50% since July last year, when impairments were first flagged on Western Areas’ nickel assets. Lithium prices have fallen precipitously over the period, and nickel hasn’t fared much better.

Citi expects the bulk of asset earnings downgrades from the company for the financial year are now done. On Tuesday, the broker upgraded its rating to Buy from Hold, while yesterday cutting its target to $8.60 from $8.90.

Macquarie believes putting Cosmos into care & maintenance is a key positive as it reduces the uncertainty surrounding additional capital costs. This broker retains Outperform, cutting its target to $9.20 from $9.90.

Morgan Stanley notes the situation at IGO has gone “from bad to worse”, retaining an Equal-weight rating and cutting its target to $7.25 from $8.85.

UBS can’t yet see a reason to be more positive on lithium prices, and downgrades to Neutral from Buy, cutting its target to $8.30 from $9.50.

Bell Potter (Buy, target $8.50) is yet to update, otherwise the consensus target among the five brokers monitored daily by FNArena has fallen to $8.61 from $9.13.

Beyond brokers monitored daily, Jarden retains Buy, “but not ignoring weak macro can alter timing of deployment of growth capital”. Jarden’s target falls to $9.61 from $9.73.

Goldman Sachs retains Buy on valuation, cutting its target to $8.85 from $9.70.

Evans & Partners retains a Positive rating but has a preference for Mineral Resources ((MIN)) in the space. This broker values the company at $10.30, but does not offer a target price.

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