The Liontown Resources Ltd (ASX: LTR) share price has risen 13% last week. What’s going on?
The Liontown (LTR) share price strength comes despite the recent dip in lithium prices from over US$80,000/mt to under US$60,000/mt.
LTR: investors ‘buying the dip’
Investors seem to have bought the dip on Liontown shares after it announced a capital expenditure (capex) blowout at its Kathleen Valley lithium project from A$545 million to A$895 million, in January 2023.
Liontown, having spent $73 million on the project to date, retains ~$685 million of funding capacity comprising ~$385 million of existing cash reserves and $300 million via a debt facility (on attractive terms of BBSW +1.5%).
After this announcement, Lintown chairman Tim Goyder purchased $1.5 million of shares on market, in a show of support for the company being oversold.
Liontown production plans
The Kathleen Valley project is aiming to ramp up to 700 ktpa (kilo tonnes per annum) of spodumene concentrate from underground mining operations. Construction is ramping up on-site, with the first tonnes expected on schedule by mid-2024.
With binding offtake agreements in place from big-name customers such as Tesla, Ford, and South Korea’s LG Energy Solutions, LTR has ticked the boxes required to de-risk the project leading up to first production.
Is Liontown a takeover target?
Investors looking for major miners to take over their junior exploration company are often disappointed. Liontown could be the exception to the rule as it is in the unique position of owning 100% of what looks to be a Tier 1 deposit, forecast to be a bottom-quartile cost-curve producer.
Rio Tinto Ltd (ASX: RIO) has previously flagged its interest in the lithium sector and BHP Group Ltd (ASX: BHP) has been active in its pursuit of ‘future facing’ minerals, including nickel and copper.
Most recently, BHP agreed to acquire ASX-listed copper miner Oz Minerals Ltd (ASX: OZL) for A$9.6 billion. Before that, RIO acquired the Rincon lithium brine project in the ‘lithium triangle’ in Argentina in March 2022.
Why would a major player be better interested in acquiring Liontown? It’s all about arbitraging their relatively lower cost of capital.
Major miners like BHP and RIO can potentially finance projects out of their existing free cash flow, or should they have to raise capital (either debt or equity) they can do so on far more favourable terms. At least, relative to a cash-burning, single-project developer.
The differential in the ‘cost of capital’ means that a project like Kathleen Valley might actually be more valuable (higher net present value) if it was owned by a bigger company.
This theory can be applied to a range of projects around the world where cost and access to capital are the key hurdle to a significant share price re-rate. This, in turn, is the reason why major mining companies can have an enduring competitive advantage.
Is the Liontown share price attractive?
Liontown is one of our preferred lithium development plays, given the quality of the deposit and attractive economics at current lithium prices. However, investors should note that it will take time for LTR to start producing any meaningful cash flow and dividends.
4 out of 5 brokers that cover Liontown rate the stock a ‘buy’ and the consensus price target is $1.96.
