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Gina Rinehart boosts stake in Liontown amid Kathleen Valley mine tensions

For the second time in a week, Gina Rinehart has increased her stake in the lithium mine developer, Liontown Resources (ASX:LTR), as her Hancock Prospecting company intensifies its scrutiny of the Kathleen Valley mine’s construction in Western Australia, along with the project’s escalating costs.

On the final trading day of the month and quarter, Hancock Prospecting revealed that it had raised its Liontown stake from 10.69% to 12.39% by acquiring another 38.8 million shares at a cost of $108.8 million. This comes after Hancock confirmed last week that it had spent $132 million to acquire a 4% stake in Liontown.

Hancock has now invested approximately $740 million in securing a Liontown stake, seemingly in an effort to complicate the $3-a-share bid from global lithium giant Albemarle. Albemarle is currently conducting due diligence on Liontown and its Kathleen Valley project before formalizing a $6.6 billion offer.

Tim Goyder, Liontown’s chairman, remains the largest shareholder with 15%, while around 20% is reportedly held by investors, mainly from Western Australia, closely associated with him. Hancock appears to be counting on the fact that Goyder may not be able to vote his shares during the scheme arrangement meeting of Liontown shareholders and could potentially challenge others aligned with him. Hancock seems intent on obtaining a blocking stake to jeopardize Albemarle’s eventual success.

Following some fluctuations around the $3 mark, Liontown shares have dropped to around $2.96 after the recent cost overrun and delay announcement regarding the Kathleen Valley project. The cost has escalated by $56 million to $951 million in two estimates this year.

Liontown has opted to increase the mine’s output to 4 million tonnes a year (starting at a 3 million tonne rate instead of the initially planned 2 million) after two years, not four years as previously intended. The additional facilities required to achieve this are estimated to cost $63 million.

Although Liontown’s CEO, Tony Ottaviano, maintains confidence that the project will commence production by mid-2024 (with all major construction and mining contracts now awarded), Hancock Prospecting insists that the cost news reinforces their earlier observations of “significant execution, operational ramp-up, and market risks.”

Hancock has noted that the capital cost increase does not factor in inflation and has cautioned that the actual project cost could exceed $1 billion. Additionally, the revised operating cost estimate for Kathleen Valley has surged by nearly 50%. The company has also warned that shareholders would bear the financial burden of covering the additional funding needs.

However, this assertion seems nonsensical, as if the Albemarle bid is confirmed, any higher costs would be borne by them, not the current shareholders. Conversely, if Albemarle’s bid is unsuccessful, Liontown’s share price could plummet, potentially leading to a project halt and Hancock facing significant losses. In such a scenario, Hancock might be compelled to contribute a substantial amount to cover its share of the costs, assuming it remains a shareholder.

As of now, Hancock has not disclosed its plans, if any, for Liontown and Kathleen Valley. However, it is worth noting that Hancock also holds shares in other lithium companies like Patriot Battery Metals and Delta Lithium. A three-way merger with Liontown could potentially create a global industry leader.

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