Core Lithium Ltd

ASX:CXO

Earnings Call Analysis

Core Lithium Posts Strong Quarter Amid Challenges

Core Lithium had a robust operational quarter with a 50% increase in ore stocks and improved mining operations despite double the average rainfall. A significant 20% increase in recovery rates was noted, with spodumene production rising by nearly 40%. However, the company had to pause mining due to a substantial 54% drop in spodumene prices. They decided to process stockpiles only, expecting to continue until mid-year. The cost guidance was lowered, with cash operating costs now $800 to $900 per tonne, reflecting strategic responses to preserve cash and value amidst volatile market conditions, with a focus on production optimization and project economics for BP33. The exploration program's results for the year are upcoming, setting the stage for potential operational revival in alignment with market conditions.

Navigating Market Headwinds with Strategic Decisions

The company kicked off the discussion by acknowledging a strong operational quarter. However, the backdrop of a challenging market was evident in the 54% drop in spodumene prices which led to the suspension of mining operations, a tactical move to preserve cash and value. They increased ore stockpiles by 50% and improved recovery rates by 20% to 60%. In light of the wet season and market conditions, they paused lithium fine shipments and put the BP33 project on hold, resulting in a lowered capital and cost guidance. Despite this, the company boasts a solid cash balance of nearly $125 million at the end of the quarter.

Cost Reduction and Operational Efficiency

The company has substantially reduced its sustaining capital, effectively to zero, for the next six months. This decision contributes to a revised unit cash operating cost range of $800 to $900 per tonne, assuming no significant new capital outlays. The company and its off-take partners have reached an understanding regarding the adjusted production schedule. The intent is to continue processing the accumulated stockpiles, mitigate care and maintenance costs estimated between $3 million and $3.5 million for the second half, and navigate the volatile pricing environment with strategic shipping and sales decisions.

Leveraging Mining Assets and Future Opportunities

The company continues to explore opportunities to extend the ore body at Grants and has plans to fast-track tonnes at the BP33 project. This proactive strategy aims to compensate for any potential operational downtimes. Importantly, the company has no debt, maintaining a robust cash balance as a buffer against continuing drops in lithium pricing. Plans for funding and offtake for the BP33 project are still in discussion, keeping options open for future capital infusion and sales contracts.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to Core Lithium Q2 FY '24 Quarterly Update Conference Call. [Operator Instructions] We'll be taking questions via the telephone today. The dial-in information to join the teleconference can be found on the stock exchange release yesterday. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the call over to the first speaker today, Mr. Gareth Manderson, CEO. Thank you. Please go ahead.

[Gareth Manderson, executive]

Thank you very much, and thank you very much for those that have taken the time to dial in this morning. I appreciate you and your interest in Core Lithium.

A very solid quarter from an operational perspective. So quite strong results. But we also need to acknowledge the 54% drop in spodumene price during the quarter, which has led to your Board and management taking the decision to pause mining operations. And we can talk a little bit about that in detail.

As I look at the operational performance for the period, we've seen a 50% increase in ore stocks on the ROM, which is a deliberate strategy to decouple the mining operation from the processing facilities for the upcoming wet season. And we've seen some really solid performance out of the mining team with all of the preparations going into the wet season. So we had close to double the average rainfall in November, and we saw a very smooth mining operation during that period, and as I said, an increase in ore stocks.

We've seen a 20% increase in recovery, so 60% recovery average for the quarter, close to 40% increase in spodumene production at a grade of 4.7%. The average realized price $1,418 a tonne, still subject to a couple of QPs that we've acknowledged in the quarterly report in the early part of this year.

We've also paused lithium fines shipments for 2 reasons. One is the wet season. We also forecast that we would not be producing and selling fines during the wet season. However, we will also need to see an improvement in market conditions before we would see that as being a reasonable product moving forward.

BP33 is -- progressed very well during the period. We'll talk a little bit about that in some detail shortly. However, we did pause to preserve cash entering into the wet season as we need to think about timing of that particular project with the current market conditions. But quite pleasingly, we've seen a 35% increase in the measured and indicated resource for BP33. And we've provided an announcement earlier that indicated we've seen 9.4 million tonnes now at 1.52% of that measured and indicated level. The overall exploration program for CY '23, the results are coming in, and we'll provide an update on that in due course.

Cash balance at end of quarter, close to $125 million. And you'll see that our capital and cost guidance has been lowered reflecting the suspension of mining and the cost reduction program that's well and truly underway.

During the period, we had 1 recordable injury to an arm, which is provided in detail there, and there's been some strong actions and response from the team in that space. Required some surgery or stitches to resolve. And the gentleman is doing quite well and returned to work close to after that particular incident.

CRM and wet season preparation have been a significant focus in the quarter. And we've also provided 8 community grants. The decision to seek mining puts us in the best cash and cost position to weather the current market conditions. It preserves value. We looked at a number of different options to keep mining moving forward. But what that ended up doing was increasing the cost to move back at the mine. So pausing actually allows us to preserve the value of the ore that's remaining in the Grants pit. It also gives us some flexibility from a commercial perspective in terms of placing of any product that's available outside of the resolved agreement with one of our offtake partners. And we can spend time now defining our path forward, understanding BP33 and shifting the focus from being schedule driven to actually the best economic outcome for that particular project.

As I think through the strategic review of operations, I'll just run through some detail there. The Grants pit has been temporarily paused. However, we will process stockpiles, and we expect to be able to close the stockpile until around about the middle of this year. This puts us in the best position to minimize our costs, preserve our cash position and ensure that we can maintain that long-term business plan for Core Lithium. We've seen a 54% drop in concentrate prices over the quarter and close to 85% drop since January of 2023.

Production is expected to be broadly in line with guidance based on lithia units. We'll continue to process those stockpiles, and we should have sufficient ROM through to the middle of this year. We've reduced our sustaining capital. We've taken a look at all of the study cost, exploration costs and corporate costs, and made a series of changes in that space, and we'll continue to work on that in the coming months. That's seen us reduce our unit cash operating cost to $800 to $900 a tonne, which actually allows us to sell product based on the shipping schedule that we've agreed with one of our customers and any additional shipments we can sell into the market if we're comfortable with the pricing terms or we can hold until we are comfortable with the market conditions.

I'm really pleased with the progress that the team has made to improve recoveries. We've seen -- I guess, since we started commissioning the plant, we've moved from a recovery rate of mid-40s, so around 47%, through to 60%. In fact, over the last month or so, we've actually seen a 63% recovery in December. And that's on the basis of the optimization work that was to improve our crush size or increase crush size from around [ 6 million to 10 million, ] our optimization of feed and plant parameters, some debottlenecking work, and also quite importantly, is some reliability work to improve the stability of the operation. And you can see there quite a healthy uptick in recovery and great plant performance from that perspective.

So our focus is very much on managing the business through the current market conditions, and that's in 2 levels. One is the -- get the best cash outcome for the business over the next 6 months to produce concentrates, reduce costs, preserve value, understand the BP33 project and shift to a focus on the project economics and timing for that. It was schedule driven. You've actually seen us in the quarter, complete the box cut excavation. We've also started to complete some of the stabilization at the portal and some initial establishment of foundations for the tunnel lines. We could have continued on. That was our plan to complete the box cut. However, when you look at the wet season and some of the risks around cash and costs in that particular perspective and the fact that actually when you think about the timing of the BP33 project, if you're pausing that, putting it on to care and maintenance, is the best cash outcome for the business and preserves the value and doesn't expose us to the risk of additional cash outline.

So we're focused on costs and production optimization to the middle of the year until we complete those stockpiles. When market conditions improve, we'll take a look at restarting mining operations and continuing concentrate from the ore that's provided in that space. The BP33 study and the Carlton study are still continuing. We have all of the -- the exploration were complete for '23 exploration season. We're in the process of collecting that data. We're waiting on assays, and we'll go through a review to understand what's the process and the plan forward for exploration across Finniss, Shoobridge and Anningie-Barrow Creek in the coming year. And we'll prepare the business to respond. So we'll monitor market conditions, and we'll make decisions to suit those market conditions in terms of restarting mining operations, processing and making decisions around our growth project options and exploration.

So at that point, I will pause and give an opportunity for people to ask some questions.

[Operator]

[Operator Instructions] First question comes from the line of Tim Hoff from Canaccord.

[Timothy Hoff, analyst]

Just on that recoveries, it's a good outcome there for the plants. Looking at the material you've got on the ROM, would you expect recoveries to hold close to that 60% moving forward? Or is that a structural change? Do you think you've got a better control of the material?

[Gareth Manderson, executive]

Yes. No, very good question, Tim. The intention is to maintain that recovery at around 60% or higher. So we'll continue to work on recovery improvement. I think the -- you're probably alluding to potential variability in the stockpile. So we've done our best to make sure we understand that and think about how we actually manage the feed presentation from ROM stocks or ore stocks into the plant.

[Timothy Hoff, analyst]

Excellent. And then maybe with the cash operating cost. Can you just walk us through what's included in that and what's excluded?

[Gareth Manderson, executive]

Well, I'll ask Doug to perhaps respond to that question.

[Douglas Warden, executive]

Yes, sure, Tim. Look, the royalties is the only thing not included in that from a site operating cost perspective. It includes freight and all site costs. That royalties that are guided as well, which is pretty easy to calculate. We've left out of that for people to calculate based on their view on price.

[Timothy Hoff, analyst]

And then CapEx would be included in that, like sustaining capital?

[Douglas Warden, executive]

Well, sustaining capital going forward for the next 6 months anyway will be effectively 0. It's excluded from that number.

[Operator]

Next question comes from the line of Adam Baker from Macquarie.

[Adam Baker, analyst]

Just maybe one on the offtake partners and in light of the curtailment moving forward. Just wondering if you could shed some light into the discussions you've got with them? And are they supportive moving forward with your decisions to [indiscernible] production?

[Gareth Manderson, executive]

Yes. So the discussions with offtake partners have gone quite well. You might recall that at the last quarter we talked about a change in grade and timing, very productive conversations, and those have continued in this particular space. The EGM commercial and ourself are actually in China in October, November period, and we met with all of our customers and potential customers in that space. They are continuing to engage with us and are comfortable with the approach that we're taking, and we're delivering into the schedule that has been agreed with one of those partners. And we've got a number of parties who are interested in the remaining shipments.

[Adam Baker, analyst]

Great. And maybe just one on royalties. Is there any developments there? The Northern Territory government is spending the [ press ] lately on the back of weakening critical metals prices. But yes, any developments on that front with developing a more appealing scheme for royalty payments in Northern Territory?

[Gareth Manderson, executive]

No. Look, no real update on royalties from that particular perspective. What I would say, though, is that upon announcing the pausing of mining, I actually met with a number of parts of the NT government, including the mining minister. And the NT government continues to be very supportive of the operations, appreciates the market conditions that we're faced with. And for us and for the NT government, they're focused on the medium to long term.

[Operator]

The next question comes from the line of Jon Bishop from Jarden Group Australia.

[Jon Bishop, analyst]

Well done to the site team for obviously picking up in terms of production and throughput there, which is pleasing to see. Just a couple of questions around sustaining capital. Obviously, you've been able to crimp that a little bit in terms of your full year guidance. What does care and maintenance capital look like assuming current prices hold for the next 12 months? And if I look at your feasibility, I think sustaining capital was estimated at $69 million. Obviously, that's probably a stale number now. But are you able to give us an idea of what sustaining capital look like versus care and maintenance?

[Douglas Warden, executive]

Yes. Thanks, John, it's Doug. I'll take that, and Gareth might want to add. But in the quarterly, on the bottom of Page 4, we do have, in the fine print, a footnote around the operating unit cost, and this kind of goes to Tim's question as well, excludes $3 million to $3.5 million for the half or for the second half, I should say, in care and maintenance and demo costs. Now that's not envisaging the whole site goes on care and maintenance, obviously. That's just envisaging what we've announced, which is that mining is suspended. And so it's really the cost around demobilization and the costs associated with maintaining safety and more heavy around the pit and trying to maintain that pit so that we can get back into mine as best we can.

So in terms of ongoing care and maintenance, should things change in the mine, will the operation go in entirely on to care and maintenance? We haven't guided that. And we're hoping that doesn't happen, of course. But we'll work through those numbers in due course if and when it's required.

[Jon Bishop, analyst]

Okay. No, that's helpful. So for my purposes, if I'm to assume somewhere between that care and maintenance number per your footnote of, call it, $7 million a year versus the $22 million that you're guiding to full year, that would be a rough ballpark to kind of kick things bubbling along?

[Douglas Warden, executive]

Yes. Bear in mind the $22 million that we're guiding for the full year has essentially been spent. So that was associated with finalizing and finishing off the Finniss project. Mine water dams is a big component of it in the quarter as we called out in the quarterly. But for the second half, that number is basically just whatever carryover there is from November and December in terms of cash flow or cash outflow, but we're not planning on spending really anything. So you shouldn't extrapolate that number going forward.

If we get back up and mining, the sustaining capital will obviously need to be looked at with the fresh lens and reguided in FY '25. So it's -- I think it's important to note that most of that is effectively spent in the first half.

[Jon Bishop, analyst]

Yes. No, that's helpful. So therefore, in terms of your site all-in sustaining costs for the second half of the year, we should take [ 800 to 900 ] per guidance in trading stockpiles, and then add in the [ 3.5 ] roughly for the site care and maintenance and demo costs. Is that about right?

[Douglas Warden, executive]

Yes, yes. And the one thing I should have noted with Tim's question is freight to China is not included FOB Darwin as well as royalties. It doesn't include freight to China. Just CIF equivalent, you need to have a freight estimate.

[Jon Bishop, analyst]

Yes. That's helpful. So just to take that right the way through, I mean, obviously, we're in a fairly bearish environment at the moment. Do you have obligation to deliver and hence continue to treat stockpiles at the moment? Or should prices continue to erode, do you have discretion to suspend treatment of those stockpiles as well if there is economic?

[Gareth Manderson, executive]

Well, I think that's a conversation that we had with the offtake partner. They're working quite closely with us. It's been a good relationship. You've seen, as I mentioned earlier, that adjustment to timing and grade. And it's important to also understand that this is an entire market. So the offtake partners are also subject to the supply-demand dynamic that we're seeing at the moment.

[Jon Bishop, analyst]

Yes. Understood. That's fine. One final question, if I may. Can you make any comments as to where things are at with the [ Tesla ] arbitration or mediation?

[Gareth Manderson, executive]

Yes. So no real update, Jon, compared to last time. The 2 companies are in conversations that work through without litigation.

[Operator]

Next question comes from the line of Milan Tomic from JP Morgan.

[Unknown Analyst]

Just on -- with the BP33 build pause and the FID deferred, how are you thinking about the potential knock-on effects of project sequencing beyond Grants as a result?

[Gareth Manderson, executive]

Yes. So that's a really good question, Milan, and will be a subject of the, I guess, the analysis and planning work that we'll do over the next couple of months. The -- I think at the end of the day, the value for Core is in that growth profile, but it's also in timing it appropriately with the market. So Grants is a generator reaction. It's also a great lead in to the -- a project like BP33 in terms of establishing commercial operations, processing operations, et cetera, and derisking the entry to the mine. So I think that thesis still remains, and we just need to work out the timing in line with the BP33 project.

[Unknown Analyst]

Yes. And just, I did notice that the older FY '25 production guidance had flagged a 3-month gap in the ore supply. I think it was over the wet season. Does the curtailment at the Grants pit extend or push out this potential gap?

[Gareth Manderson, executive]

I think it actually changes it in terms of the mining sequence. So I would say that guidance is now style, and we need to look at the new ore schedule when we recommence mining.

One other thing I could probably just add to that, Milan, is that there is a fair bit of work that's gone into the BP33 project schedule and mine plan to see if we can pull tonnes forward. And there's a lot of work that's been done around Grants to see if there's opportunity to extend the ore body. We know that there's ore underneath the mine plan as possible to capture that and close those sorts of gaps. So those levers are still live and available to us.

[Operator]

Our next question comes from the line of Hugo Nicolaci from Goldman Sachs.

[Hugo Nicolaci, analyst]

Just starting with a simple question, a not complicated answer. What sustainable spodumene price do you think you need to see to actually restart the mine?

[Gareth Manderson, executive]

Very good question, Hugo. Look, I think the best way to answer that is there's a broad range of factors, of which price would be one that we would use to make a decision around getting back into mining. And we've talked a little bit about timing of projects, we need to take a look at what the ore schedule looks like. And probably most importantly is understanding the market dynamic because if we see a bump in price, how durable is it and how consistent that we think it will be over time.

[Hugo Nicolaci, analyst]

Yes. Got it. So probably more work to do on that one. Fair enough. And then maybe just one around, I guess, how you're seeing balance sheet and funding. I mean, obviously, I was in Liontown this week around the commercial debt syndicate reducing the borrowing capacity on falling lithium prices. I mean Finniss still has major project status with the Australian government until February. I mean do you have any option potentially around other sources of capital for the project at this stage?

[Gareth Manderson, executive]

So we don't have any debt, and we've got a good solid cash balance at the end of the quarter, [ plus ] $125 million. And the actions that we've taken have been directed towards preserving that cash for the business and the optionality moving forward.

In terms of funding for projects, there's a number of parties that actually even called us in the last couple of weeks just to keep the contacts alive and are still interested in talking to us about offtake and funding options attached to that in the -- around BP33. So I think that question is something that we will work on answering here when we're a bit clearer on the timing of BP33.

[Hugo Nicolaci, analyst]

Got it. So just to clarify then. I mean can you sign offtakes at BP33 in the near term? Or would any volumes there have to go into your existing offtakes before new offtakes could start getting filled?

[Gareth Manderson, executive]

So our current offtake partners in the current plan would actually see us using product from BP33 to fulfill those offtake agreements. And as I said before, we've resolved the offtake agreement with one partner. The other is still open. And so moving forward, that needs to be part of our consideration as well as where and how we place product into that ore schedule.

But to answer your question more directly, there's no change to the original thesis around core quality in, which is that those offtakes will be serviced by both Grants and material from BP33.

[Hugo Nicolaci, analyst]

Right. And just squeezing one more in if I can touch on taking an impairment just around the shutdown. I think you had about $250 million of book value for the asset in June. Do you know what price in terms of spodumene was used for that previous assessment?

[Douglas Warden, executive]

For the impairment assessment for the full year to 30 June 2023, is that what you're asking?

[Hugo Nicolaci, analyst]

Yes. Well, I mean, effectively, I mean just trying to gauge what the size of that impairment is I appreciate you're probably still working through that, but maybe just as a starting point, what lithium prices did you use when you did your book valuations back at the FY '23 result?

[Douglas Warden, executive]

Yes. Well, we -- off the top of my head, I can't recall, to be honest, but it would effectively have been consensus or wood map pricing or a combination of those when we did the accounts. So a bit from there. But yes, we're still working through that with, first of all, internally and then with our auditors.

[Operator]

Our next question comes from Andrew Harrington from Petra Capital.

[Andrew Harrington, analyst]

In terms of remaining capital spending, you've listed out sort of the difference between the original and revised FY '24. Can we take it that, that most of that has already been spent, as per your earlier response to a question?

[Douglas Warden, executive]

Yes, that's correct. It will just be carryover cash outflow in January largely, potentially a bit in February from work that was done in November, December.

[Andrew Harrington, analyst]

[ The first half, yes. ] Okay. And a more broad question on pricing. The qualification period really penalizes you while it's -- while the price is falling. And that 2-month period seems to be open to gaming by the customers. Is there -- is there no option or opportunity to sell on FOB is in the price that they're happy to pay today is the price that they pay rather than sailing a ship in circles while the price is falling, so they can maximize the qualification period discount?

[Gareth Manderson, executive]

Yes, Andrew, I mean your observation is absolutely correct. The QP period postdate from shipping actually does favor the customer in a falling market, but it also favors the supplier in a rising market as well. We have the agreement in place with one of the offtake partners that's resolved in that shipping schedule. And as I alluded to, there are a couple of shipments in the coming half that we can think about some of those sorts of options.

[Andrew Harrington, analyst]

I guess, the question is that in a falling market, they can take their time sailing, and in a rising market, they'll go as quickly as possible. So the -- sort of they get a benefit both ways. So FOB pricing will be better and common across other commodities as far as I'm aware. So is nobody doing that? Or is -- or is it something that you're working towards?

[Gareth Manderson, executive]

Well, we have a -- with our offtake partner, we have an agreement that when that QP period has been defined. So it's really just a matter of the shipping schedule, positioning the [ lake ] and then delivering against that schedule. The schedules are agreed, and that's it. Was there anything else, Andrew?

[Andrew Harrington, analyst]

Sorry. I think I lost you for the last 30 seconds or so. I don't know if that was across everybody, but apologies, could you repeat maybe last?

[Gareth Manderson, executive]

The QP arrangements are established. And the shipping schedule is set with the customer. And we're working with them in terms of delivering in that. So it's kind of set from that perspective, Andrew.

[Operator]

[Operator Instructions] At this time, there are no further questions from the line. I would like to hand the call back to management for closing.

[Gareth Manderson, executive]

Excellent. Well, thank you very much, everybody, who's on the call. Appreciate your interest in Core. It's an, unfortunately, quite a difficult market to -- for any spodumene producer to navigate at the moment. We've taken action with Board and management working together to get the best cash and cost position that we put the business in. It will preserve value. And then when market conditions improve, we want to position the business to be able to take that opportunity moving forward.

But I do want to highlight, and I'm really pleased with the progress that's been made on site from a mining and processing perspective to see such a significant improvement in recoveries up to 20% higher than where we were last quarter to see the mining operation enter into the wet season very successfully, above average rainfalls in November and essentially I didn't skip a beat during the quarter. So I'm very, very pleased and proud of what the work has resulted in for the team.

We will continue to work carefully over the coming months to ensure that we do preserve the value per course so that we can move, we get ourselves in the best cash position and we make best use of those stockpiles that we've been able to accumulate in the last quarter.

So thanks again for your time on the call. I appreciate the questions. Take care.

[Operator]

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines..