For several years IGO shares reaped the benefits of growing demand for battery metals and the fact it was well managed to capitalise on it. The company has three nickel projects and exposure to two lithium projects. Not many ASX companies offer such diversified exposure. Unfortunately, the Battery Metals Bust of 2023 has caused IGO shares to more than halve over the 2nd half of 2023. Is this just part of the boom & bust cycle of these commodities, or was the last boom as good as it was ever going to get for the company?
Who is IGO?
IGO has been listed on the ASX since 2002 at just 20c per share. It grew into the giant it is through the acquisition and development of several major projects – both those it discovered in its own right and those it acquired and took to the next level. The Tropicana Gold Mine is a great example of this – it was discovered in 2005 and was offloaded to Regis Resources as it sought to focus exclusively on battery metals.
It has two divisions: Nickel and Lithium. The former has three nickel projects in WA: Cosmos, Nova -Bollinger and Forrestania. Nova-Bollinger was acquired in 2015 when Sirius Resources was snapped up while the other two were only bought in June 2022 after the acquisition of Western Areas. Spoiler alert for later in the article: This deal has not turned out so good for reasons which we will come to. The fundamentals of Nova still look good – it is the lowest cost nickel operation in Australia.
The Lithium division has a 25% stake in the Greenbushes and a 49% stake in Kwinana, buying these stakes in 2020 from China’s Tianqi. Greenbushes lies just 90km from Bunbury and is the wortld’s largest and highest-grade hard lock lithium operation. IGO thinks it can support another 21 years of mine life with an average of 9.5Mtpa (million tonnes per annum). It is spectacularly low cost compared to many of its peers such a Mineral Resources (ASX:MIN) and Pilbara Minerals (ASX:PLS).
Why did IGO shares surge so much?
In a nutshell, because the company was reaping significant benefit from the battery metals boom.
In FY22, IGO made $903m in revenue (up 35%) and a $331m NPAT (down 40% although FY21 waa inflated by the sale of Tropicana). In FY23, $1.02bn in revenue and a $549m NPAT (up 66%). This was achieved despite the impairment charges at Forrestania and Cosmos, all due to spectacular spodumene production and sales remaining strong.
So why have IGO shares gone down?
The answer here is also simple. Because the battery metals market has undergone a significant correction. Although this has not yet been shown in IGO’s results, it won’t be long before it will be.
The nickel and lithium bear markets are key
Let’s look at nickel specifically. 12 months ago, the benchmark price for nickel on the London Metals Exchange (LME) was US$30,000 per tonne. Now it is barely above US$16,000 per tonne. There is a general oversupply of nickel in the world as EV sales are weaker than expected. Also hurting matters was rapid growth from nickel producers in Indonesia, many of which are backed by Beijing. Indonesia has more than half the world’s production and it could have 66% by 2032 if forecasts from Benchmark Minerals turn out right. As noted above, IGO has recorded a ~$900m impairment against Western Areas and now may have to write-off that entire amount. The Cosmos project has been completely shelved in light of the costs. As for Nova – what’ll happen to it is anyone’s guess.
Turning to lithium and spodumene prices fetched US$850 per tonne in January 2024, down from US$6,400 per tonne a year ago. Ouch. So as goes without saying, it means that lithium production is a lot less profitable, maybe not even viable for some companies.
There have been a few other matters that haven’t helped IGO. Long-time boss Peter Braford died in October 2022, a big blow to the company given how long he successfully led the company. A permanent replacement was only found in January in former Rio Tinto executive Ivan Vella. It will take some time for him to prove himself in the role in the eyes of investors.
Investors are also remembering that IGO is only in Greenbushes as a minority JV-partner. It has to pay royalties on the agreed mechanism when other industry players not in JVs do not, has no marketing rights and is at the mercy of Tianqi’s discretion as to whether or not it gets dividends – a fact highlighted when IGO didn’t even get a dividend for the December quarter. It is essentially a passenger.
But hey, the company will bounce back when lithium prices do, right?
Not so fast.
Arguably the worst thing about the JV deal the company is stuck in is that selling pricing is based on backward-looking benchmark prices. So even when lithium prices recover, it’ll take even more time for this to be seen in IGO’s revenues. Tianqi can buy spot volumes for lower so Greenbushes will sell 25% less than it produces.
You also have to wonder how US foreign entity of concern rules impact it considering it is in a JV with a Chinese company. The US is a lucrative market for battery metals, but IGO may be missing out on that market when many of its ASX peers ultimately will not.
Consensus estimates for IGO forecast terminal decline in the company’s revenues over the coming years:
- $804.9m in FY24
- $644.8m in FY25
- $581.7m in FY26
- $374.7m in FY27
And this is drawn from a grand total of 15 analysts. Their mean target price is $8.32 – a 19% premium to the current price. The estimates vary from a high of $10.50 to a low of $6, but even the former figure is well below the company’s all time high.
Should I buy IGO shares?
Given all of the above, no. We would avoid the battery metals sector for the time being, or at least companies that are only exposed to it. We wrote a few weeks ago about Mineral Resources, that is more diversified and is undervalued, in our view.
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