Company Overview: Kidman Resources Limited explores and develops precious and base metals deposits in New South Wales (NSW), Western Australia and Northern Territory. Its other principal activities include development of its Burbanks Gold Project located in Western Australia; acquisition of the Mt Holland asset located in Western Australia, and carrying out all requirements in relation to the acquisition of the Mt Holland Project. It operates in the exploration for base metal and rare earths industry within Australia. The Mt Holland Gold & Lithium project consists of both exploration and resource drilling. The Burbanks Gold Project is situated near Coolgardie, Western Australia. The Browns Reef Project is located close to the township of Lake Cargelligo in central NSW. The Crowl Creek Project is made up of eight exploration licenses located near the township of Condobolin in Central NSW. The Esmeralda Prospect is situated 58 kilometers southeast of the productive Croydon Goldfield in North Queensland.
 

KDR Details
 
Update on applications for exemption from minimum expenditure obligations for tenements held by KDR: Kidman Resources Ltd (ASX: KDR), is engaged into the exploration and development of precious and base metals deposits in New South Wales, Western Australia, Queensland, and Northern Territory, Australia. The company’s flagship asset is the Mt Holland Gold & Lithium project located near Southern Cross, in the Archaean Forrestania Greenstone belt of Western Australia. The company is also engaged in the exploration for zinc, lead, copper and silver deposits. Meanwhile, KDR had been waiting for a recommendation from the Perth Mining Warden to the Minister for Mines and Petroleum (Western Australia) with regard to the company’s applications for exemption from minimum expenditure obligations for tenements held by Kidman subsidiaries. These exemption applications are related to the period between August 2014 to March 2016 and affects 13 tenements at the Mt Holland Project. This period was before KDR had acquired the Mt Holland Project on 7 July 2016. However, KDR recently received the notification of the recommendation from the Warden to the Minister that the applications for exemption from minimum expenditure obligations on the relevant tenements will be refused. As per the statement, the Warden’s recommendation is not binding, and the minister has the power to grant certificates of exemption to Kidman and its subsidiaries, notwithstanding the recommendation. KDR has been preparing detailed submissions to the Minister that will outline the reasons why the certificates of exemption should be granted. The outcome is due in the near term. The tenements could become liable for forfeiture if the grant is not received while ray of hope comes from the Western Australian State Government already granting Lead Agency Status on the project, and KDR/SQM JV set to potentially invest heavily in initial project development.
 

Financial Parameters (Source: Company Reports and Thomson Reuters)
 
Progress on JV Project: Kidman and Sociedad Quimica y Minera de Chile S.A (SQM) have strategically invested more than $55 million in the Mt Holland Project, which is anticipated to create more than 350 jobs by 2021, along with additional jobs through the construction phase. The project is projected to make a significant contribution to the Western Australian economy through taxes and State royalties. The technical, operational and commercial activities of the Mt Holland Project are on track as planned. On the other hand, WAL, which is the JV between KDR and SQM is continuing to advance with the Definitive Feasibility Study on the mine and concentrator at Mt Holland, expected to be completed in Q4 2018. WAL has planned to commission the refinery in 2021, with an initial annual nameplate capacity of 45,400tpa of lithium hydroxide or ~37,000t pa of Lithium Carbonate. KDR maintains the right to participate in up to 50% of the refinery investment and market its portion of refined product. KDR has also started discussions with lenders in relation to debt facilities to fund the Mt Holland project. The joint venture between SQM and Kidman Resources is expected to consolidate the three complementary lithium production plants worldwide, that includes the Salar de Atacama in Chile, the Salar de Caucharí in Argentina, and the Mount Holland Spodumene deposit in Australia.

SQM sells its stake in Minera Exar: Kidman’s 50:50 joint venture partner at the Mt Holland lithium project, Sociedad Quimica y Minera de Chile S.A (SQM) along with its subsidiary SQM Potasio S.A. has signed a contract with Minera Exar, Lithium Americas and GFL International Co. Ltd. (Ganfeng).  As per the contract, SQM Potasio will sell to Ganfeng their entire stake and irrevocable participation in Minera Exar, the company that is the owner of Caucharí-Olaroz lithium project in the Jujuy province of Argentina. Further, as per the contract Exar will prepay the total amount of the loans received from SQM Potasio and Exar will pay SQM for the services it provided to Exar during the development of the Project. As per the Contract, SQM and SQM Potasio will get an approximate amount of US$87.5 million. However, this Contract is subject to certain conditions and expected to close during the fourth quarter of this year. Moreover, SQM Potasio and a subsidiary of Ganfeng will have to sign an agreement, according to which a deferred amount of US$50 million will be paid to SQM Potasio. This will also be subject to compliance having targets on certain product sales of the Project. Moreover, SQM has planned to expand in Chile, where the company expects to almost quadruple the capacity in the coming years. SQM will also focus on the efforts in Australia, where the company expects significant production potential due to the size of the existing resources.

Leasing a premier site in the Kwinana Strategic Industrial Area: KDR’s joint venture management company, Covalent Lithium, has signed into an exclusive option with Landcorp in Western Australia to lease a premier 76-hectare site in the Kwinana Strategic Industrial Area. This is for a duration of 24 months, during which time final lease terms are to be agreed. Further, this site comprises of all necessary infrastructure including logistics (rail, road and port), energy (electricity and natural gas) and access to chemical reagents and supplies as well as proximity to a pool of highly skilled labour. The refinery is planned to get commissioned by 2021, with an initial annual nameplate capacity of 45,400 tonnes of lithium hydroxide. Kidman will participate in up to 50% of the refinery investment and market its portion of refined product.
 

Oblique view of Kwinana refinery site (Source: Company Reports)

Cash Position and Issuance of Shares: KDR’s cash balance has risen on the back of the conversion of KDR options, and currently stands at $10.0 million. As at 30 June 2018, the number of fully-paid KDR shares on issue is 399,560,792. Further, in FY 18 KDR had issued 14,810,063 fully paid ordinary shares to Capri Trading Pty Ltd as consideration related to the share sale and purchase agreement dated 29 February 2016. Kidman had also issued new fully paid ordinary shares with regard to the conversion of unlisted options. The company had exercised a total of 47,419,356 options at 15c resulting in the receipt of $7.1 million and the issue of 47,419,356 fully paid ordinary shares.

Lithium hydroxide offtake agreement with electrical vehicle manufacturer: KDR has signed a binding agreement with pioneering Electric Vehicle (EV) manufacturer, Tesla to supply lithium hydroxide. As per the agreement, the initial term is of three years, which is based on a fixed-price take-or-pay basis from the delivery of first product and the agreement also included the two 3-year term extension options. KDR’s agreement with Tesla equates to less than 25% of the Company’s portion of initial nameplate refinery production for the first three years. Moreover, KDR is also in discussions with other strategic, globally-significant companies for seeking refined lithium offtake, particularly having strong interest in lithium hydroxide. The expressions of interest from these parties have significantly exceeded Kidman’s portion of initial refinery nameplate production, which reflects the demand exceeds supply. KDR is targeting to enter into a limited number of offtake agreements to assist in its negotiations with traditional debt financiers. It is envisaged that KDR will commit approximately 75% of the proposed 22,700tpa of lithium hydroxide to offtake agreements while leaving a minority portion of future supply uncontracted.

Outlook: KDR’s Covalent Lithium joint venture is expected to complete the Definitive Feasibility Study into the Mt Holland mine and concentrator in the near term and the Definitive Feasibility Study for the Refinery by the end of CY18. Further, KDR will continue to make progress on discussions with a number of strategic parties seeking lithium hydroxide offtake agreements.


Earl Grey Resource Update (Source: Company Reports)

Stock Recommendation: KDR has fallen 42.15% in three months as on October 16, 2018 and has been in an oversold territory. This is on back of notification received by the company that the Warden has recommended the Minister to refuse the applications. Further, the Western Australian Government has already granted Lead Agency Service status to the Mt Holland Lithium Project. The Definitive Feasibility Study for the Mt Holland mine and concentrator is progressing on schedule and is expected to be released in few months. On the other hand, as per Updated Mineral Resource, the Earl Grey Lithium Deposit is now projected to contain 189 million tonnes at 1.50% Li2O (7.03 million tonnes of Lithium Carbonate Equivalent). This is a 54% increase on the December 2016 Earl Grey Mineral Resource and confirmed Earl Grey as one of the world’s most significant hard rock lithium deposits. The Definitive Feasibility Study for the Kwinana refinery is scheduled to be completed in Q4 of 2018. Meanwhile, KDR is trading at A$1.00, has support at $0.63 and resistance at $1.265. The group has been facing some challenging period lately, however, the lithium sector is again getting a boost from battery demand and this can provide an upside to KDR as well given the strength in partnerships it has with big players across the globe. In the medium term, there can be an estimated upside of single digit to early double digit in the price given the improvement in earnings per share (though expected to remain in negative zone for next year) while lithium demand is gaining traction and the risks on grant of exemption are borne in mind. Based on the foregoing and the prevailing low levels of the stock, we give a “Buy” recommendation on KDR at the current price of $ 1.00 (up 6.4% on October 17, 2018), ahead of the annual general meeting planned for November 15, 2018.
 

KDR Daily Chart (Source: Thomson Reuters)

 
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