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

Kidman Resources Ltd (ASX: KDR), having a market capitalization of $564.69 million, is an Australian Lithium developer. The company has gained attention from the work on development of a world class integrated Mt Holland Lithium Project; and this is done along with the world’s leading lithium producer, Sociedad Quimica y Minera de Chile S.A. under a 50:50 joint venture. Lately, KDR signed a Memorandum of Understanding (MoU) with LG Chem and this in addition to the arrangements with Tesla and Mitsui, which are well-known global leaders, aims to help KDR position itself better for securing project debt financing for the Lithium business. While risks owing to potential delays at Mt. Holland development or change in funding abilities, higher capital expenditure along with commodity price fluctuations may pose some challenges, the group is expected to sail through well given the support from big market players and development in hand.
 

Project De-risking through offtake arrangements (Source: Company Reports)
 
Positive outcome of the prefeasibility study (PFS) on the proposed Kwinana Refinery: KDR's JV, called Covalent Lithium, has been able to demonstrate key updates towards the potential of the integrated facility. Primarily, KDR from the prefeasibility study (PFS) completed by Covalent Lithium on the proposed Kwinana Refinery, has received positive outcome, which has now become the part of the integrated pre-feasibility study (IPFS) and definitive feasibility study for the entire Mt Holland Lithium Project. Major outcome of this IPES during the December 2018 quarter reflects that the project has long-life and has a low-cost operation. The projected annual average production from the entire Mt Holland Lithium Project is 45,254 tonnes of LiOH (in which KDR will have a share of 22,627 tonnes due to 50:50 Joint Venture). Currently based on testing to date, the project has conservative 5.5% Li2O concentrate grade, which can be optimized during the definitive feasibility study stage. The project results so far demonstrate a post-tax NPV 10% (nominal) of US $ 2.2 billion (100%) with healthy margins. Further, payback in about 3 years and a good internal rate of return of 26.6% have been other key highlights. In line with the previous projection, the total integrated capital expenditure will be of US $ 737 million, which means KDR will have to incur US $ 368 million, that also includes the contingencies. C1 cash operating cost (net of by-products) has been estimated to be US $ 4,507/ t LiOH (excluding government royalties) as per IPFS; and there is a possibility of further optimizing the figure during the definitive feasibility study stage. For the development of the Mt Holland Lithium Project after IPFS, the next stage for the project is to go for definitive feasibility study that has already commenced in the December 2018 quarter, and is projected to be completed in the first half of 2019, after which the company will take final investment decision.


Summary outcomes of IPFS (100% basis) – Base Case (Source: Company Reports)

Maiden Ore Reserve for the Earl Grey deposit at Mt Holland: Earl Grey is a high-quality deposit and one of the largest hard rock lithium deposits with Mineral Resource of 189Mt @ 1.5% Li2O. This deposit is strategically situated in the tier-1 mining jurisdiction of Western Australia. KDR during the December 2018 quarter, has announced the maiden Ore Reserve of 94.2 million tonnes at 1.5% Li2O for this Earl Grey deposit at Mt Holland. There is significant potential for further upside from its exploration work.


Ore Reserves for the Earl Grey Deposit (Source: Company Reports)

Other Developments for the Mt Holland Project during the December 2018 Quarter: During the December 2018 Quarter, KDR had signed deed of settlement with the objectors to the applications regarding the exemption from minimum expenditure obligations for the Mt Holland tenements. Subsequently, all objections to the applications regarding the exemption were withdrawn. The Minister for Mines and Petroleum (Western Australia) also granted exemption certificates for the Mt Holland tenements that were under subject of exemption applications. Perth Mining Warden also granted the orders for dismissing the forfeiture applications in this regard. Moreover, the Mt Holland Lithium Project comes under the jurisdiction of both Commonwealth and State legislation. Both of them assessing the development of the mine, concentrator and the associated infrastructure, at Mt Holland. The level of assessment is currently under a Public Environmental Review. Further, Covalent Lithium has started the baseline studies to handle the permitting requirements at the Refinery like the air quality, noise, groundwater, flora and fauna, etc. Covalent Lithium has appointed the consulting group, Urbis, for submitting relevant documents for the approval. Covalent Lithium has appointed an experienced consulting group, MBS Environmental Consultants, to EP Act Part V Works Approval and Licence to Operate. Additionally, during the December 2018 quarter, the company continued with the district-wide soil geochemical sampling programme at Mt Holland, and collected 2,199 samples. These results will be taken into consideration for follow-up drilling in the first half of 2019.

Offtake arrangements during December 2018 Quarter: During December 2018 Quarter, Kidman continued to make significant progress for securing the binding contracts with high quality customers for approximately 75% of its share of LiOH production (circa 22.6kt per annum of LiOH), meant for the initial years of the Mt Holland Lithium Project. During the quarter, the company had signed the binding Heads of Agreement with Mitsui regarding the supply of LiOH. The arrangement includes an initial term of two years and an option for a two-year extension is provided over this. The agreed volumes as per the contract to be supplied by Kidman will increase gradually and will equate to less than 15% of KDR’s share of nameplate production from the Refinery of 22.6kt per annum; and the definitive supply agreement is expected to be signed by 30 June 2019 by both the parties. Moreover, KDR has signed a non-binding Memorandum of Understanding with LG Chem; and this is with regards to the supply of LiOH. The MOU includes the commercial terms related with the supply of 12kt per annum of LiOH over a term of ten years. The parties have agreed to work for the execution of a binding Strategic Supply Agreement by 31 July 2019. Overall, KDR continues to get significant interest from potential customers regarding its share of lithium hydroxide production from the Mt Holland Lithium Project. As a result, KDR will continue its evaluation related with other marketing opportunities for longer-term production share from the project. Thus, agreements with these high quality offtake counterparties like Tesla, Mitsui & Co (definitive agreement pending), LG Chem (definitive agreement pending) and underlying terms will also underpin way for debt finance, validation of project’s global significance, certainty of committed volume in initial years and retain the exposure to price upside.

Joint venture funding & SQM milestone payments: During the December 2018 Quarter, KDR had signed the funding term sheet with its JV partner SQM related with the Mt Holland Lithium Project. According to the term sheet, SQM had agreed that it will provide KDR capital expenditure debt facility of US$100 million to partially fund KDR’s share of construction of the Mt Holland Lithium Project. Further, it was agreed that SQM will provide the facility up to US$10 million to fund KDR’s share of JV cash calls before receiving SQM’s outstanding milestone payments. Currently, KDR has received SQM’s milestone payments, cancelled the US$10 million facility according to its terms and has repaid the initial drawdown of US$1.5 million. Therefore, both the parties have mostly completed the definitive agreements for the US$100 million facility and now expecting to finalise these in the first quarter of 2019. This funding will be used to support further advancement of the Mt Holland Lithium Project. In addition,  it reflects the completion of SQM’s earn in for its 50% share of the Mt Holland Lithium Project that the company had announced in July 2017.

Update on Debt Financing of the Project: During the December 2018 quarter, the company had completed the first stage of its debt financing process, and received the indicative terms from prospective debt financiers related with the potential project financing facility to fund KDR’s share of capital expenditure for the construction of the Mt Holland Lithium Project and the associated owners’ costs. Further, KDR as part of the debt financing of the project has got the confirmation of receiving significant interest and has selected core group of banks. Debt Financing Process comprises of multiple leading domestic and international lenders. Kidman has planned to start the next stage of its project financing process in the first quarter of 2019, along with the completion of the integrated definitive feasibility study.


Lithium Demand and Market Scenario (Source: Company Reports)

Stock Analysis and Recommendation: KDR stock has risen 18.22% in last one month as on February 19, 2019 post a one year fall of 25.8%. The company is trading at a price of $1.415, and has support around $0.80 and resistance at $1.53. Kidman Resources Limited is having a decent standing when it comes to its key margins. The company’s net margin has witnessed a YoY improvement in FY 2018 which indicates the company’s improving capability to convert its top line into the bottom line. Moreover, the company’s operating margin has also improved in FY 2018 as compared to FY 2017. The company’s return on equity or ROE has also witnessed a YoY improvement of 55% in FY 2018 and stood at -59.9%. Its current ratio has witnessed a YoY improvement of 35% in FY 2018 and stood at 0.56x. On the daily chart of Kidman Resources, Exponential Moving Average or EMA has been applied and default values were used for the purposes. After observation, it was noted that the company’s stock price has crossed the EMA and had trended in the upward direction after the crossover which signifies bullishness. Therefore, there are expectations that the company’s stock might witness a rise moving forward.

While KDR reported for a change of interest by Western Areas that had relevant interest in KDR through David Southam who now ceases to be an employee of Western Areas, the group is not expected to be impacted by this as such. KDR now relies on its strength while it has de-risked a substantial portion of the project that has robust economics.



Tentative Project Timelines (Source: Company Reports)

Primarily, the results of integrated PFS reflected strong economics of the project and the company expects Integrated DFS in 1H 2019. Further, KDR has now funded the initial stages of project capital expenditure and the company’s offtake arrangements will provide further support for KDR’s ongoing bank financing discussions. Kidman has been actively progressing with its debt financing process and has received significant interest to date. Next phase of Debt Financing Process is scheduled to commence in Q1 2019. Moreover, there is high demand for lithium hydroxide to be used for batteries of electric vehicles. The demand for lithium ion batteries is projected to grow at approximately 30% per annum between 2012 and 2030. Despite the past volatility in lithium market, the demand scenario is expected to build up through to 2025 and beyond, and provide an upside to KDR in the next couple of years. Therefore, we give a “Buy” recommendation on the stock at the current price of $ 1.415.


KDR Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.