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Core Lithium (ASX: CXO) has been one of the hottest ASX stocks post-pandemic.
The company believes it is building the newest and most advanced lithium project on the ASX and that the company is on its way to become Australia’s next lithium producer at its Finniss Lithium Project to take advantage of the high lithium prices.
However, 2022 was a volatile year for the company’s share price and it has more than halved since its all-time high. Is it time to buy the dip or are you catching a falling knife?
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Who is Core Lithium?
Core Lithium’s flagship project is the Finniss Lithium Project covers 500 square kilometres within the NT’s Bynoe Pegamite Field lying 88km trucking distance from Darwin Port.
Lithium was first discovered there in 2016 and the project has grown ever since. The April 2022 Definitive Feasibility Study (DFS) reported a JORC compliant Mineral Resource of 15 million tonnes (Mt) at 1.3% lithium oxide.
The study reported a Pre-Tax IRR of 80%, an NPV of $114m and free cash flows of $158m from $501m revenue. A 180,000tpa operation was anticipated.
What are the Best Lithium Stocks to invest in right now?
Check our buy/sell tips on the top Lithium Stocks in ASX
What’s the big deal with Core Lithium?
Being a lithium company, it was a target for investors wanting exposure to the lithium thematic. There is no other commodity undergoing such a rapid expansion in demand over the next decade.
But in the last three years, the company has transitioned from explorer to producer, something that cannot be said in respect of many other lithium companies.
Just last week (on April 5), the company announced the maiden 3,500 tonne shipment of lithium spodumene concentrate was delivered to Darwin port ready for shipping to Yahua.
However, it has not been all smooth sailing. Lithium prices are coming down from all time highs and will continue to. Although Core Lithium will remain profitable for a few years, margins will shrink considerable according to the company’s own estimates.
It is said that those who don’t learn from history are doomed to repeat it.
The last lithium boom in 2017 occurred as producers failed to anticipate the demand shock from China’s subsidy-driven roll-out of EVs.
The boom soon turned into a bust as the supply response, especially from hard-rock spodumene producers in Australia, overcame the increased demand.
As a result, many lithium projects were deferred or even terminated, building the base for another lithium boom later on.
History is repeating itself here.
The demand for lithium once again soared in 2021 and caught producers off-guard. This time the demand surge was led by Western nations’ decision to take more serious steps in the combat against climate change through green energy transition and EVs.
An influx of investments into global lithium mining in 2020-21 has prepared numerous lithium projects to get into production in the next few years. Lithium prices have only just begun a correction and investors fear more is to come.
Some upside to come even if margins shrink
However, we think Core Lithium has some upside left in it. The company will continue its shipments and these will begin to be reflected in the bottom line before too long.
Furthermore it is continuing exploration activities at the project that will have further lithium.
Indeed, the company has a second mine (BP33) that will commence production in 1HCY24 and will deliver 1Mtpa.
If the Core Lithium share price fails to reach 2022 highs, it is realistic prospect that it could become a takeover target.
So overall, we think the company’s share price sell off has been overdone, although shareholders will hope that lithium prices don’t continue to fall.
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