Core Lithium shares present a very exciting opportunity for contrarian investors in 2024

Nick Spencer Nick Spencer, February 9, 2024

The last few months have been rocky for Core Lithium shares, both figuratively and literally. The lithium explorer’s share price has seen a stark fall from grace over the past 18 months as the commodity began losing the market’s popularity contest.

In fact, the company recently made the decision to temporarily grind its operations to a halt, stepping into care and maintenance at the start of January to wait until prices take a hike again.

Still, no success story is without its fair share of setbacks and Core Lithium’s new lithium developments and healthy balance sheet should still give investors a boost in confidence. Plus, it did have the confidence to turn down a contract to supply Tesla last year, so it must be doing something right.

 

A new lithium mine

Core Lithium’s got its Finniss exploration project in the NT, just 88 km Southwest of the Port of Darwin. The first lithium project in the territory, Finniss is a multi-mine operation with both the Grants open mine pit and the BP33 underground sub-project under its belt.

In September 2022, Core Lithium started mining at Grants, less than a year after ore was discovered on site. They started making good on the ore a couple months later after their first sale. BP33 is a bit more of a long game, with a final investment decision on the fate of the mine set for release in March. Given current lithium prices though, we think it’s a fair call to say Core probably won’t be in a rush to get it up and running.

 

Experienced leadership

However, it’s also fair to say that the company is in good hands judging by the look of its leadership. CEO Gareth Manderson is no rookie to say the very least. The bloke spent just over two decades working at Aussie mining giant Rio Tinto both on projects in Australia and Canada. With experience in both business development and plant operations, he’s a mining executive that’s not afraid to get his hands dirty.

Another point on the board for Manderson is that the NT is far from foreign to him, having had a four-year stint leading the development of a uranium Mine near the Kakadu National Park.

 

Lithium prices on a bumpy road

The price of spodumene concentrate—lithium ore in layman’s terms— plunged 86 percent throughout 2023. Yes, not good. Most analysts attribute this to Chinese demand dropping in the wake of severe economic turbulence in the Middle Kingdom.

Lithium price

 

Countless economies are also putting their quest for sustainable technology on hold as they battle high interest rates. There is also the reality of increased supply as the world’s lithium producers ramp up capacity. Spodumene concentrate’s price downturn has had a huge impact on Core Lithium. It got so bad that the company had to stop trading until prices return to their usual perch. Still waiting.

Market players also caught on to the company’s troubles, with Core Lithium now the third-most shorted stock on the ASX at 12.87% of total shares according to ASIC data. This is terrible news for the company’s share price given that short-selling places further downward pressure on securities.

In fact, Core Lithium is more volatile than 75% of Australian stocks.

 

Analysts are pessimistic

Anyhow, let’s take a gander at the fundamentals shall we? Core Lithium’s share price is unfairly valued given its P/E ratio sits at 38.5x compared to the 10.3x average of its top five peers/competitors and the natural resources industry average of 11.8x. According to 10 analysts covering the stock, its target price based on fundamental value is lower than its current share price. Markets can be irrational sometimes.

The company’s ROE of 3% is also very low relative to industry norms given red flags are typically waved at the sight of one below 20%. Mind you, this will almost certainly improve for the company’s shareholders, who may just need to wait a bit longer for those juicy returns.

Although recording net margins for years, the company recently became profitable in June last year with its first-ever net profit of $10.8 billion.

 

Solid balance sheet

Core Lithium also boasts an extremely healthy balance sheet. The company records zero debt. You read that right … ZERO. This means it won’t have to worry about sky high interest rates. Both Core Lithium’s short-term and long-term assets significantly exceed its short-term and long-term liabilities as well.

Then there’s the definitive feasibility study (DFS) the company released back in 2019, a good window into the company’s long-term prospects. Core Lithium’s DFS boasts an NPV of $114 million—a figure based on conservative assumptions about the price of spodumene concentrate retaining a price $981/t, far below what’s been realised. Even after the commodity’s recent plummet on the market, it was still trading between $1000-1200/t throughout December 2023.

In fact, just over a year before in 2022, spodumene concentrate was trading at a record high of $8,125/mt on Nov. 18 2022.

 

Relatively low Capex requirements

Its projects are also far from capital intensive, with start-up costs of just $73 million AUD and operating costs of $AUD 429/t concentrate, generating a very impressive operating margin.

The company also astutely financed its initial $29 million capital expenditures (CapEx) with a prepayment from its largest shareholder and customer Sichuan Yahua Industrial Group—a major Chinese lithium producer.

 

Core Lithium shares are for the bold contrarians

Although Core Lithium has sailed through some choppy waters in the form of short-term cycles, it’s important to look at the grand scheme of things from time to time.

The world’s transition to a sustainable economy is inevitable, with lithium being a key component. Global consulting firm McKinsey & Company forecasts sixfold growth in worldwide demand for electric vehicles alone over the course of the decade, with sales jumping from 6.5 million in 2021 to approximately 40 million by 2030.

So, yes, downtrodden demand for lithium won’t be here to stay. Such struggles aren’t unique to Core Lithium either, with most lithium producers significantly affected. And given the strength of the company’s financials and likely positive future earnings, the contrarians might end up making out well in this one, in the long term.

 

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