The one specific problem
Back in March I wrote about Core Lithium (OTCPK:CXOXF) and pointed out that really, from the usual numbers we can see, it ought to be worth much more than it is. But it isn’t and as always reality beats our ideas of what ought to be. Especially about money – prices are what prices are whatever we think they should be. So, the task was to work out what was holding back the Core price?
If it ought to be because, then what’s the detail that means that the price isn’t?
My identification back then was the detail of standard lithium offtake contracts:
There’s nothing wrong with Core Lithium that I can see. What I’m trying to explain though is why the share price hasn’t soared along with the lithium price. As best I can make out the reason is that the price to be paid for Core’s output is capped and capped at the low prices of a couple of years back. Not for all production but for a significant part of the entire mine run and for possibly all of the initial few year’s output.
I do not know, we do not know, what that cap on the price in that offtake contract is. As a rough guess – and please do note this really is a mildly informed by market conditions guess and no more than that – I’d mutter that something in the $900 to $1,000 range sounds about right. -Ish, maybe.
Well, this can now be tested
Core has brought the mine into production. We didn’t think they wouldn’t, that wasn’t what we were thinking the problem would be. They’ve shipped some raw ore around the turn of the year, but now they’ve got the concentrator up and running and can deliver real, industrial product.
Maiden Finniss concentrate shipment to depart Darwin Port
Ooh, super! They’ve got the mine and concentrator up and running, are producing and have actual and real income! That’s usually a huge valuation event for a miner. But it doesn’t seem to be here at Core. So, another thing we’ve got to try and explain.
So, what’s the price of this shipment?
Core’s maiden 3,500 tonne parcel of spodumene concentrate (with a high-quality grade of 5.6% Li2O) has been successfully trucked to Darwin port and is ready for shipping to foundation customer Sichuan Yahua (Yahua).
The foundation customer is another name for the offtake partner who provided a chunk of capital in return for that supply contract with a price cap on it.
Production of the second spodumene concentrate shipment is underway- a 15,000 tonne parcel of spodumene concentrate to Yahua. Both shipments have been sold on an FOB basis and are linked to the Fastmarkets (spodumene 6% CIF China) price. Core will receive 90% payment for the first parcel and 80% of the payment for the second parcel in April. The balance of the purchase price for each parcel will be received following receipt of each respective parcel by Yahua.
Eh, What? The Fastmarkets price is this one. It’s not quite the LME but it is used as a reference price – in the same way that many Metals Bulletins ones are used in minor metals. Some premium/discount to that price is written into the contract.
But we were told that the contract with Yahua had a cap, right? So what’s this at market prices?
The agreements for these tonnes are in addition to the existing binding agreement to sell Yahua 300,000 tonnes over four years, signed in 2019
Ah. So, this shipment isn’t part of that agreement that has the cap. For Yahua this doesn’t really matter; they’re going to be buying some material at market prices anyway. And buying it from Core provides more capital for a company they’re very interested in anyway. So, Core is a preferred source, even at full market price.
Yahuya are still going to get their 300k tonnes at the capped price. In fact, this injection of cash into Core increases the chances of that contract being honoured. And it is a goodly chunk of cash too:
In April 2023, subsequent to the quarter, Core received 90% of the payment for this parcel being an amount of US$14.1 million (AU$21.0 million) with the remainder due upon shipment, currently expected in May. Yahua also agreed to the purchase of a second parcel of 15,000 tonnes of concentrate under a pre-payment arrangement. In April 2023, subsequent to the quarter, a payment of US$61.4m million (AU$91.6 million) was received for 80% of this, with the balance due upon delivery.
Math has never been my strong point but I work that out to be in the $6,000 to $6,500 per tonne range (albeit in AUD, not real ones).
Which is an awful lot more than the $1,000 USD cap that I’m guessing at for that offtake contract.
But, as above, it’s not part of the offtake contract.
The importance of this
We can see, in the accounts, the revenue from this shipment. But the thing we’ve got not – not – to do is think that this is going to be the price for all future shipments. This is outside that offtake contract with its price cap. We’ll actually find out what that price cap is when we back calculate from shipments and revenue received – sometime in the next 6 months perhaps.
Now to be more positive about Core Lithium
On the other hand there are positive things about Core. One is that they’re actually in production. That’s good – lots of mines fail to do that. They’ve also expanding the indicated and inferred resources. That has more importance – for that offtake contract (the one with the cap, recall?) has a defined size to it. That 300k tonnes. So, if the mine can be expanded, or the mine life can be extended, then more of the production of the mine can be sold at market, not capped, prices.
Now, to really work that out you need more math than I have so that’s left as an exercise for the reader. Don’t forget to include estimates of what the market price of lithium is going to be some years in the future. Mine is much lower than at present but maybe that’s just me.
The point of this update
It would be possible to think that Core should be making fortunes on their upcoming shipments of lithium concentrate. Because, look, they just shipped some at a very full, linked to spot market, price.
But they’re very specific. This shipment (or two if we prefer) is detailed to be outside the offtake contract. That cap on that contract price is still going to bite. And it’s going to bite for 300k tonnes of production too.
To reiterate
I don’t think there’s anything wrong with Core Lithium. Bringing a mine into production is a real, proper, achievement. The only problem I see at all is that in return for capital 4 years back they locked into an offtake contract at the prices of four years back. That’s going to depress earnings as against what could, might have, been possible from current spot prices. So, we can’t value current production at current spot prices.
Which is, I think, why the Core Lithium price isn’t soaring. As, without that price cap, it would be.
My view
I think there’s a possibility that Core will work through this. The whole point of the cap and collar on these sorts of offtake contracts is to make sure that the miner can produce at a profit. Maybe not too much of one, but the collar also insists that prices won’t fall below production costs (although inflation can play hell with that calculation).
It’s the expansion of Finniss, the ability to deliver substantial amounts of material over and above that offtake contract that really matters therefore.
The investor view
Having said why Core isn’t soaring it’s a bit odd that there’s an opportunity here. For anyone who is prepared to do the hard work that is. Work out what production will be. Then how much of that much goes to Yahua under the capped offtake contract. What’s left over? And how does that change if production can be increased? That’ll be the value that might well not be included in the current stock price.
No, I’m not going to do that calculation as that’s moving well off my knowledge base. I’m not happy advising you on your money when I don’t know. Entirely happy to tell you what I do of course.
I can see that in theory there might be something there. Whether there really is – well, I have said that math isn’t my strong point, right?
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