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Liontown Resources’ cost blowout

Liontown Resources (ASX:LTR) has further exposed its financial vulnerabilities with another cost overrun on its Kathleen Valley lithium project in Western Australia’s northern Goldfields.

The company has accepted a $3 per share cash offer from US lithium giant Albemarle. However, Gina Rinehart’s Hancock Prospecting is working to acquire a potentially blocking 10.7% stake.

On Friday, Liontown released a new cost estimate for the mine at $951 million, up from the revised January figure of $895 million and significantly higher than the December 2019 forecast of $240 million. Notably, Liontown did not reference the original cost estimate in Friday’s announcement.

To counter the negative impact of rising costs, Liontown announced an acceleration of its previously planned expansion to 4 million tonnes per year, two years ahead of the initial schedule.

According to Liontown, “Kathleen Valley remains on schedule to commence first production of spodumene by mid-2024,” with an average cash cost (C1) expected to be A$651 per SC6 (spodumene) tonne over the initial 10 years of production.

Liontown is in advanced discussions with a consortium of commercial banks and government credit agencies to secure the necessary funding for its operations until positive net cash flows are expected.

Meanwhile, Albemarle is progressing with its due diligence and has received updated cost estimates for the project.

The new cost estimate includes $26 million for early mine development and the accelerated expansion to 4 million tonnes per year, as well as $37 million for building the 567,000-tonne pre-first production ROM stockpiles from mining operations.

Open pit mining began in January, with ROM stockpiles providing a crucial source of ore for the processing plant. These open pit and ROM stockpile operations aim to mitigate risks during the ramp-up of underground operations.

The optimized underground mine plan, called the ‘two orebodies, one mine strategy,’ will support the initial 3 million tonnes per year ramp-up and accelerate the path to 4 million tonnes per year starting in year four (2027).

Regarding funding, Liontown anticipates securing a debt package, at a minimum, to cover the $450 million required for capital costs, early mine development, pre-first production ROM stockpile construction, corporate costs, and working capital.

Liontown also revealed its decision to abandon plans to sell ‘direct shipping ore (DSO)’ ahead of actual mining due to declining global lithium prices, opting instead to ore sort the DSO and process it in-house. However, the company retains the option to sell the DSO material if market conditions improve.

Following Friday’s developments, Liontown’s shares dipped to approximately $2.94 per share, suggesting that investors have resigned themselves to the Albemarle acquisition and are awaiting further updates and due diligence results.

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