Lithium: Developer KIDMAN RESOURCES LTD (KDR) KDR.asx Speculative Buy. World-class lithium deposit attracts major partner

Transcription

1 Lithium: Developer KDR.asx Speculative Buy Kidman Resources Ltd (KDR) KIDMAN RESOURCES LTD (KDR) World-class lithium deposit attracts major partner SQM.nyse has executed an agreement with Kidman Resources Ltd (KDR) to acquire 50% of the Mt Holland Lithium Project in WA for US$30m (cash) plus financing US$80m of the JV s initial capital expenditure for project development. We assume a 2Mtpa plant with estimated capex of A$190m. The look through value for 100% of the project from the transaction is US$140m (~A$186.67m), which is lower than our previous (preliminary) valuation. However, it now means that the financing structure for Mt Holland is more certain. Once the initial US$80m has been spent the JV parties will contribute on a 50:50 basis. KDR will also have the option to participate in up to a 50% interest in a proposed refinery for lithium carbonate/hydroxide. PFS due soon, FS to be completed in CY18 The Company expects to release a PFS for Mt Holland early DecQ. With an investment decision due to be made some time in 2018, we assume that the Mt Holland Lithium project will be in production by late 2019 (in line with SQM s recent media release) and the refinery 6 months afterwards. SQM enters spodumene race with Mt Holland SQM appears to be a late entrant into spodumene, with this apparently their first investment. Mt Holland looks like a world class spodumene development asset, and hence it makes sense for SQM to invest in it. It is well located (near Perth) if the JV decides to build a downstream processing centre (the Chinese lithium company Tianqi is currently constructing a refinery in Kwinana, Perth). Being a late entrant means there may be some urgency to progress the project quickly. To that end, we note SQM is pre-paying US$21.5m of the US$80m via a convertible note for KDR to advance the JV ahead of expected completion (in September). Retain Speculative Buy The price to secure Mt Holland appears cheap based on expectations of high spodumene prices. Hence, it seems plausible KDR could attract another offer. We assume minimal value for the refinery given the considerable study work still required to complete. However, we can see considerable potential value. As an indication of potential value, Tianqi has budgeted $400m to build a 24ktpa lithium hydroxide refinery in Kwinana (in construction now). We estimate that using spodumene at cost, a similar refinery could generate US$200m pa of earnings, suggesting value in excess of US$3b is possible for KDR/SQM proposed 40ktpa operation. Moving downstream does remove some of the risk around spodumene oversupply by having ownership of the conversion facilities. Potentially, the refinery can be worth considerably more than the mine itself, and we believe this is the reason the Company has entered the agreement (sold the mine lower than our valuation to enter downstream). The other risk partially alleviated is financing, although we still assume more dilution in our valuation. While we see strong merit to the deal, it requires more de-risking of the downstream processing facility in order to define and attribute the full potential value. SQM and KDR are targeting the spodumene operation to be in production in CY19, which suggest a lot more information will be forthcoming relatively soon. Hartleys speculative valuation is 92cps (post deal). We maintain our Speculative Buy recommendation on KDR, with our latest price target of 92cps. Share Price Prelim. Valuation $0.92 Price Target (12 month) $0.92 Brief Business Description: Excellent, but early stage, hardrock lithium project in WA plus a good advanced gold exploration portfolio, also in WA. Hartleys Brief Investment Conclusion Quality large undeveloped and good-grade hard rock lithium project. Attracts new JV major partner (SQM). Chairman & MD Peter Lester (Chairman) Martin Donohue (MD) Major Shareholders Capri 9.8% Western Areas (WSA.asx) 5.2% Company Address Level 7, Collins Street Melbourne VIC 3000 Issued Capital 333.3m - fully diluted Market Cap - fully diluted Cash (est) * Debt (est) * EV EV/Resource Spod. EV/Reserve Spod. Prelim. (A$m) Prod (spod Mt) Op Cash Flw Norm NPAT CF/Share (cps) EPS (cps) P/E FY19e loss A$72.0m A$34.7m Mt Grade Mt Li2O Resources (Li2O) % 1.8 Reserve (Li2O) none Mt Grade Moz Au Resources (Au) Reserve (Au) none * Assumes Con Note ~A$28.7m and cash ~A$40m received Aug-16 Trent Barnett Head of Research Ph: Kidman Resources Ltd 17 Jul 2017 $ m A$186.7m A$213.2m A$149.4m A$81.2/t n/a A$ 10. M Nov-16 Mar-17. Jul-17 E: trent.barnett@hartleys.com.au Hartleys has assisted in the completion of capital raisings in the past 12 months for Kidman Resources Limited (Kidman), for which it has earned fees. Hartleys has provided corporate advice within the past 12 months, and continues to provide corporate advice to Kidman for which it has earned and continues to earn fees. Hartleys has a beneficial interest in 4 million unlisted options in Kidman. See back page for details. 20. Volume - RHS Source: IRESS KDR Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 7 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SUMMARY MODEL Kidman Resources Ltd Share Price Jul-17 KDR $0.560 Speculative Buy Key Market Information Directors Company Details Share Price $0.560 Market Capitalisation $186.7m Peter Lester (Chairman) Level 7, Collins Street Market Capitalisation - full dil. $213.2m Martin Donohue (MD) Melbourne VIC 3000 Net Cash (Debt) $37.3m Brad Evans (Non-Exec Director) ph: Listed Investments (est) $0.0m Chris Williams (GM Ops) Issued Capital m Michael Green (Expl Man) Options 47.5m Jason Eveleigh (CFO) Issued Capital (fully diluted all options) 380.8m Justin Mouchacca (Comp Sec) EV - incl. listed invest $149.4m EV - full diluted, option cash $168.8m Top Shareholders m shs % Price Target $0.92 Capri % Western Areas (WSA.asx) % Projects Interest Location Commodity Mt Holland - lithium 100% WA Mt Holland - Gold 100% WA Li Au Investment Summary Very large and significant but early stage development of hardrock lithium (spodumene) project in WA. Project quality and scale to attract a major partner (ie SQM). JORC Resources Newsflow Project Mt Grade Li2O (Mt) LCE (Mt) Mt Holland - lithium % Jun CY17 Metallurgy - Lithium Mt Holland - Li - M&I % Sep CY17 PFS work - Standalone Lithium process Mt Holland - Li - Inferred % CY18 FS work/investment decision Mt Holland - Li CY20 Construction of standalone facility? Mt Holland - Li Mt Grade g/t Moz LC CY21 First standalone concentrate sales? Mt Holland - Li Mt Holland - Gold Unpaid Capital No (m) $ (m) Ave Pr % Ord P&L FY2017F FY2018F FY2019F Net Revenue na na na Options Total Costs na na na 30-Jun % EBITDA na na na 30-Jun % Deprec/Amort na na na 30-Jun % EBIT na na na 30-Jun % Net Interest na na na 30-Jun % Pre-Tax Profit na na na 30-Jun % Tax Expense na na na Total % NPAT na na na Abnormal Items na na na Comments Reported Profit na na na Analyst: Trent Barnett Phone: Last Updated: 17/07/2017 Sources: IRESS, Company Information, Hartleys Research Page 2 of 7

3 We view the prepayment conditions as quite favourable for KDR. SQM had revenues of US$155.9m in the March Quarter from its lithium and derivatives business. The judgement was in favour of KDR, dismissing MZN s case. SQM and KDR s proposed lithium refinery will look to be the second plant built in Western Australia. PRE-PAYMENT FOR JV We view the US$21.5m that SQM will provide to KDR as a pre-payment. This money can be repaid out of KDR s share of the US$80m that will be received once the conditions precedent are satisfied. However, if the JV is discontinued KDR can either repay the money or issue shares priced at the 10 day VWAP, for the 10 trading days prior to the signing of the binding letter of agreement (which we calculate to be 68cps). We view these conditions as quite favourable for KDR and also highlights SQM s commitment to advancing the project. Sociedad Química y Minera de Chile SA (SQM): JV partner SQM is a multinational industry and application company, with its core business focussing on five business lines which include: specialty plant nutrition, iodine and derivatives, lithium and derivatives, industrial chemicals and potassium. SQM has been one of the largest lithium producers in the world, along with Albemarle and FMC, but new entrants (including Mineral Resources (MIN.asx)) are catching it quickly. SQM has lithium carbonate plant capacity of 48Ktpa with plans to increase in the near future. As of the 31st of March 2017, SQM had US$4.25B in total assets and a market capitalisation of US$9.5B. SQM had revenues of US$155.9m in the March Quarter from its lithium and derivatives business, with the Atacama Salar deposit representing 49.84% of total consolidated revenue in the same period. SQM has a joint venture (50%) with Albemarle on the Salar de Atacama in Northern Chile. The Salar de Atacama is a tier 1 lithium brine asset and has one of the highest concentrations of lithium. Favourable Court Ruling for KDR On 7 July 2017, the Supreme Court of WA announced its judgement in relation to MZN claiming ownership of the lithium rights at Mt Holland. The judgement was in favour of KDR, dismissing MZN s case. Concluding determinations by the Supreme Court Justice Kenneth Martin included: I have now rendered the preceding findings of fact, mostly without controversy, largely from the parties' exchanged chronologies of events. Nothing emerging in an analysis of those now collected facts, objectively viewed, on my view, detracts from a relatively straightforward legal conclusion that no binding or concluded contractual agreement was ever reached as between these parties as regards lithium rights or pegmatite rights concerning the Mt Holland tenements on 4 April 2016, or at all. Western Australia s lithium refineries SQM and KDR s proposed lithium refinery will look to be the second plant built in Western Australia. Tianqi s $400m lithium refinery is currently being constructed in Kwinana and has a planned output of 24ktpa of lithium hydroxide. Tianqi is currently undertaking a feasibility study into doubling capacity of the plant to 48ktpa. Tianqi is the 51% owner of the Talison Lithium Greenbushes mine, which will supply the refinery with its spodumene concentrate. The first phase of the plant is expected to be completed in 2019 with the feasibility study for the expansion to be completed in October Sites being considered by KDR/SQM for the refinery include Kwinana, Bunbury and Kalgoorlie. The final decision will come down to feasibility studies which are currently being undertaken. Page 3 of 7

4 Fig. 1: Map of KDR tenure at Mt Holland Source: Kidman Resources Ltd Page 4 of 7

5 Fig. 2: Assumption Key Assumptions and Risks for valuation Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment SQM deal completes Mod-Low High Formal documentation expected to be finalised and completed before end of September. 30 year mine 2Mtpa throughput Metallurgical recoveries are reasonable Selling prices remain strong enough for spodumene mines to be viable The Poseidon agreement is not used and the Company builds a new greenfields operation Moderate High This appears conservative based on the resource to date, and very conservative if we include the exploration target Moderate High Recent test work suggests metallurgy is relatively simple High Extreme We assume selling prices and demand remain strong enough for new spodumene mines to be developed Moderate Upside We assume KDR will develop Mt Holland as a standalone operation. If capex can be saved using neighbouring infrastructure this could improve economics Company can obtain capital Moderate Extreme We expect the SQM deal to complete, and future potential funding can be sourced. Meaningful value for the gold assets Marindi (MZN) court action/appeals has no meaningful impact Moderate Low We speculatively assign $59m of value for the gold assets Low Extreme KDR has received a favourable court ruling and at this stage MZN has not appealed Exploration value Moderate Meaningful We assume speculative mining inventory assumptions and additionally some extra some exploration value. Conclusion We have used speculative assumptions to derive a valuation. Hence, we view KDR as high risk. Source: Hartleys Page 5 of 7

6 Fig. 3: KDR Price Target PRICE TARGET We have an updated price target of $0.92/s (from $1.30/s). Price Target Methodology Weighting Spot 12 mth out Speculative NPV base case, assuming equity dilution 60% $0.92 $1.03 Speculative NPV at spot commodity and fx prices 20% $1.17 $1.34 Net cash 5% $0.22 $0.22 Gold project only 15% $0.13 $0.14 Risk weighted composite $ Months Price Target $0.92 Shareprice - Last $ mth total return (% to 12mth target + dividend) 64% Source: Hartleys Estimate RISKS Adjacent to this risk, is the ability for the Company to sign offtakes for the product to provide certainty for financers. Additionally, the prices for spodumene are a risk. Eventually, other risks are similar to most developers: the outcomes of more detailed studies, metallurgy, management key-man risk, obtaining finance, relevant goverent approvals, political risk, commodity prices, commissioning success and the asset performance versus nameplate design. Our valuation is very speculative given there are no pre-development studies. Page 6 of 7

7 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Tia Hall Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has assisted in the completion of capital raisings in the past 12 months for Kidman Resources Limited ("Kidman"), for which it has earned fees. Hartleys has provided corporate advice within the past 12 months, and continues to provide Corporate advice to Kidman for which it has earned and continues to earn fees. Hartleys has a beneficial interest in 4 million unlisted options in Kidman. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 7 of 7