Lending Association

Core Lithium’s cloudy future

It was a sorry set of half-year figures from Core Lithium (ASX:CXO) last week, confirming that the company’s future remains very clouded.

The interim report came the same day as the CEO stepped down, part of Core’s slimming-down-to-survive mode.

The report reveals multiple challenges (headwinds) ahead, besides the low prices and slowing demand for the key battery metal.

There’s the big interim loss, made bigger by a huge impairment and provision for bad deals (or ‘onerous contracts’) with Chinese customers for its spodumene.

Core Lithium revealed first-half revenue of $134.8 million, but there was a 75% decline in its spodumene concentrate realized price to $US2,098 per tonne and its decision to suspend production.

Core Lithium reports an interim loss of $167.6 million, with an impairment loss of $119.6 million recorded regarding non-financial assets such as the value of stripping activity assets and mine properties as a result of suspending mining at the Grants open pit during operational review earlier this year.

With Pilbara Minerals revealing a price of $US1,200 a tonne for its spodumene in its pre-auction deal for 5,000 tonnes of spodumene, Core Lithium faces even larger financial pressures.

But seeing Core said its average selling price was $US2,098 a tonne for 6% spodumene equivalent, the Pilbara auction price indicates a lot more financial pressure for the company.

Core reaffirmed its revised guidance for FY 2024 production of 90,000 tonnes to 95,000 tonnes of 4.77% spodumene concentrate production and sales of 80,000 tonnes to 90,000 tonnes.

That is well short of the contracted amounts and the price in the Pilbara pre-sale will only make life tougher.

In 2019, the company entered into a binding offtake agreement covering 75,000 tonnes of spodumene concentrate a year over four years to Sichuan Yahua, followed by another agreement with the same volume with Ganfeng in 2021, which, ideally, contracted 80% sales of Finniss’ stage 1 production over the first 4 years of the mine’s life.

But due to problems and delays, the company only achieved the first concentrate production in February 2023, and produced 67,803 tonnes of spodumene concentrate and 64,000 tonnes of lithium fines material sold as a ~1% lithia product in the whole calendar year 2023.

As well the half-year report cut the FY2024 production guidance to 90,000 to 95,000 tonnes of concentrate, when it should have been much more – close to double that if the two Chinese buyers took all their contracted tonnages.

But from the interim report, Core Lithium will have difficulties in meeting these contractual obligations.

If it can’t meet the contracts, Core Lithium will have to pay its customers the difference between the agreed price and the price of customers’ actual payment for the replacement supply of spodumene concentrate.

That’s why the company provided $27 million for onerous contracts.

The key is the size of the difference between the contract price and the replacement cost for the two Chinese (and any other) customers.

If the difference is negative – the replacement cost is lower than the contract price, should the buyers pay Core Lithium?

Core Lithium said it had $124 million on hand at the end of 2023 – after more than two months of low-level operations and the costs of sorting out staff, job cuts, and the onerous contracts, that has to be smaller.

Normally, the easiest way of handling Core’s problems is for the losses – actual and potential, plus the value of the supply contracts, to be turned into equity and the customers take control. But seeing the main customers are Chinese companies, that is highly unlikely.