Core Exploration Limited (“CXO” or “the Company”) is rapidly progressing its flagship Finniss Lithium Project to a development decision by year-end, leveraging off the Project’s proximity to the Darwin Port and the relatively high-grade nature of the deposit. We think that the strategy makes good sense, as CXO is attempting to capture the lithium price opportunity that exists due to the burgeoning demand for chemical- or battery-grade lithium carbonate and/or hydroxide and the time lag before a meaningful supply response by major producers satisfies this demand.
Core Exploration Limited (“CXO” or “the Company”) is rapidly progressing its flagship Finniss Lithium Project to a development decision by year-end, leveraging off the Project’s proximity to the Darwin Port and the relatively high-grade nature of the deposit. We think that the strategy makes good sense, as CXO is attempting to capture the lithium price opportunity that exists due to the burgeoning demand for chemical- or battery-grade lithium carbonate and/or hydroxide and the time lag before a meaningful supply response by major producers satisfies this demand.
Finniss Project PFS delivers robust outcomes
• Published results from a recently completed Pre-Feasibility Study (PFS) illustrate a financially robust, albeit small-scale and short-life, operation based solely on the Grants deposit. Based on an assumed average 5% spodumene concentrate price of US$649/t FOB, a pre-tax Net Present Value (NPV) of $140m, Internal Rate of Return of 142% and capital payback of slightly less than 12 months is calculated from the PFS on the currently defined 26-month life of mine.
• The capital expenditure estimate for project start-up of A$53.5m is relatively low, with the major components being $20.0m for the construction of a Dense Media Separation (DMS) Plant and $24.4m for mining pre-strip. A previously executed Offtake Agreement and Prepayment Agreement with a wholly owned subsidiary of one of China’s largest lithium producers, Sichuan Yahua Industrial Group Co., Ltd (Yahua), provides for a US$20 million prepayment to be used by CXO for the development of the Grants deposit and to be offset by future product deliveries. Given that the offtake is for only around 55-60% of planned production, CXO has the opportunity to enter into an additional offtake that will contribute a similar quantum of prepayment, which could be sufficient to fund a vast majority of the required initial capex.
• Operating cost estimates are reasonable at A$372/t of concentrate (US$279/t) including royalties, with the benefits of the Project’s proximity to Darwin (grid power, skilled residential labour pool, export shipping facilities) and the simple planned processing route of DMS-only, being partially offset by the high strip ratio of the planned mining operation (ca13.8).
Action and Recommendation
• RM Research initiates coverage with a Speculative Buy recommendation. Currently, CXO trades at 4.5 cents per share, which implies a market capitalisation of $28m and an Enterprise Value (EV) of ca.$22m. Given that the Finniss Project initial development has a modest capital expenditure requirement, the Company has sufficient funds to complete the Definitive Feasibility Study and the PFS was based on what we believe are realistic product price assumptions, we believe that CXO should trade in a range of 25%-50% of the Net Present Value derived by the PFS. This implies a value of $35m-69m, which is 59%-213% higher than the current EV. Our price target is set at 6.5 cents per share (which implies a market capitalisation of $42m).
• Additional to the valuation upside of capturing an attractive price for lithium concentrate, CXO also has potential blue sky through the addition of ore feed from the nearby, highly promising BP33 deposit. BP33 is located only around 4km from Grants and is also a single 30-40m wide pegmatite ore body with similar mineralogy and grade profile to Grants. Our analysis suggests that BP33 could add a further 24 months of mine-life and lift the project NPV by a further ca.$105m, justifying a lift in our price target to more than 11 cents per share.
