Consistent performance: AJM’s Pilgangoora operations produced 46,316wmt of 6% spodumene concentrate and sold a record 58,208dmt. The reported costs for the quarter were US$369/wmt on an FOB basis excluding royalties. No comments were made on the selling price of the concentrate. We estimate that the CFR cost of concentrate is in the order of US$405/dmt, which based on other spodumene producers and market participants comments, implies that AJM made around US$15-25/dmt.
Cash is tight: AJM finished the quarter with only A$2.3m in cash. The US$161.5m loan note is fully drawn, which means the only buffer for AJM is the A$50m put option agreement – which would see more shares in AJM issued.
Offtake growing: During the quarter, AJM signed a five-year contract with Hunan Yongshan Lithium which would see a minimum of 44,000dmt sold in 2020/21 and a minimum of 60,000dmt in 2022-2025. Based on the sales in the June quarter and the consistent 6% Li2O content, it appears the AJM’s product is being well received.
Investment view: The plant appears to be going well, with operating costs low and capacity utilisation and operating efficiencies positive given the COVID-19 restrictions. However, the company’s cash position is tight and more than any of the other producers, it needs some recovery in price to take some stress off the balance sheet and be in a position to refinance the debt when it’s due in early 2023. If AJM can replicate what PLS did with refinancing its Nordic Bond and bring in some clean energy finance and spread the loan amortisation to match a likely recovery in lithium prices, as well as lower the interest, we would be more comfortable. Whilst we feel the operating cost position will keep the company liquid in the short to medium term, AJM cannot afford anything to go wrong. As a result of updating earnings and cash flow for lower spodumene prices and the current net debt, we have lowered our valuation from 22cps to 17cps. Our price target has fallen 7cps to 4cps as we use only 50% of the operation’s value to risk the company’s ability to sell more production through expansions into the market. We downgrade our rating from Hold to SELL as we await an improvement in the spodumene market. Click here to read full report