Liontown on track for mid-year lithium production in Kathleen Valley | Hotter Commodities

Liontown Resources is just months away from first lithium production at its Kathleen Valley project in Australia, but an accelerated expansion is not very likely to happen, chief executive officer Tony Ottaviano told Fastmarkets in an interview

The lithium production plant, which will have a capacity of 3 million tonnes per year, is now 75% complete and is scheduled to start production midway through the year, the CEO said.

An expansion to 4 million tpy of capacity had initially been planned for year six of the project, which would take production to around 700,000 tpy of spodumene concentrate.

“But I think the likelihood of the accelerated expansion case going ahead, based on the current protocol [to secure financing] and price forecast, is very remote,” Ottaviano said.

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“The [market analyst consensus] forecast is signaling a market in oversupply to the end of the decade, so why would I put more supply in an already oversupplied market?” he added.

A combination of prevailing lithium spodumene prices, capital expenditure costs and market volatility will contribute to Liontown’s decision to expand Kathleen Valley, according to Ottaviano.

And the company is keen on maintaining the option to reaccelerate the project’s expansion if conditions improve. Its view on forward price is different than the independent assessment used for the project, and Liontown wants to have the opportunity to expand if it so chooses, Ottaviano said.

Also, the company would look at expanding Kathleen Valley if it were offered the financing to do so, he added.

“Should another form of funding opportunity present itself that allows us to fund the 4 million [tpy] expansion, we will do it. It could be a strategic decision whereby a third party comes to us and says, ‘we want the offtake because we want to build a downstream plant,’ and we say, ‘if you fund the expansion, we’ll support that and partner with you for a shareholding in the downstream plant,’” he added.

Financing the facility

Liontown deferred the expansion because it “had sized the debt facility based on a certain strategy and scope, but also a certain outlook on price,” Ottaviano said. “We did that so that we could understand that we had sufficient coverage of our banking covenants.”

Liontown announced its funding package for Kathleen Valley to the market in October, straight after Albemarle withdrew its bid for the company.

It comprised a commitment letter and credit-approved term sheet with a syndicate of lenders for a A$760 million ($501 million) debt funding package.

“We were moving from a term sheet to the final financial documents and close [of the funding package], which required us to satisfy certain condition precedents, such as the provision of an up-to-date market forecast – including price – from an independent party,” Ottaviano said.

“If it had been based on broker consensus, we wouldn’t be having this discussion – we were fine. But unfortunately, broker consensus by the banks isn’t considered independent, and neither are some of the other forecasters,” he told Fastmarkets.

Given the significant and material change between the price forecast in October and January – a roughly 60% reduction – both Liontown and its banks had to take stock.

“We decided that it was prudent for us to review this amount of debt loading; and that’s what we’re doing. We’ll size the debt to fit in with the new price forecast,” he added.

The company has now raised over A$850 million from equity markets to help build the project and has a A$300 million debt facility from automaker Ford as part of the offtake agreement.

“We were well-funded to conclude construction, but we needed some extra money to support our working capital and to have a sufficient buffer during ramp-up in the form of a cost-overrun facility and cash reserve,” Ottaviano said.

Offtakes

Liontown has already committed 90% of its spodumene production for the first five years through offtakes with Tesla, LG Energy Solution and Ford.

The decision to go down that path was not by accident; it was a deliberate strategy to diversify by geography and by position within the battery value chain, the CEO said.

Notwithstanding the price of lithium chemicals and spodumene, Ottaviano said he is “still getting knocks on the door” for his product and has recently had “a lot of inbound interest from Chinese producers.”

“This diversification is critical, in our view, because we want to be as close as possible to where the technology is being formulated and where the technology is being adopted. Because battery chemistry is ever evolving, it’s very dynamic; it’s pretty hard to pick a winner at the moment,” he said.

Is it solid state? Is it lithium hydroxide going into [nickel-cobalt-manganese] batteries? Is it [lithium-iron-phosphate] through lithium carbonates? It’s an evolving situation, and, depending on a price point in their vehicles, [original equipment manufacturers] change their formula and mix,” he told Fastmarkets.

“We wanted to be close to where all that’s happening, so that it can help inform our strategy and allow us to be agile and pivot into whatever product we see appropriate, especially with our downstream aspirations,” he added.

Downstream

Those ambitions include a joint study into options for intermediate refining and finished lithium production, which the company is progressing with Japan’s Sumitomo.

Part of the Sumitomo assessment is whether it makes sense to go into refining at all. According to Ottaviano, conventional wisdom in the mining sector is to stop at the point of first sellable product, because that is where the highest margin should reside.

“That’s why iron ore producers don’t make steel. So why is lithium different, and if it is different, will that difference withstand [market] cycles, and is that difference permanent? This is what we going to test, because if we ignore the rest of the world, we had better be right,” he told Fastmarkets.

Liontown has enough product to do a few joint venture (JV) projects and could potentially partner with other market participants after the pre-feasibility study with Sumitomo, Ottaviano said.

“We are studying our options in this space. The three fundamental questions we need to ask ourselves and answer are: where do we build, what product do we produce – [lithium] hydroxide, [lithium] carbonate or intermediary – and who do we partner with?” he added.

A partnership might be a JV with another organization but could also potentially include a third market participant with the required technical expertise, according to the CEO.

This model could also be replicated elsewhere, given momentum to create ex-China capacity through the construction of a facility in Europe or North America or the vicinity, or a facility in Central Asia that can export to either, he said.

“We’re going to work through the pre-feasibility study probably the whole of this year, because it is quite detailed,” he added.

M&A

Liontown is staying out of the current flurry of activity in mergers & acquisitions (M&A) in the lithium space, Ottaviano said, adding that the focus is on building Kathleen Valley and dealmaking would be a distraction to that goal.

“We really don’t have the bandwidth to be focusing on M&A at this time because the company is hard at it trying to get cash flow through the door. Once we’ve established Kathleen Valley, when we’ve ramped it up and are generating cash flow, then an M&A opportunity may present itself, and we’ll look at it,” he told Fastmarkets.

“It’s not long until we get to that point, but I can’t be distracted, because the market is brutal. If I do an M&A, and it’s a masterstroke, I’m a hero; if it doesn’t go well, the market will say, ‘Tony took his eye off the ball and needs to go.’ I think I need to be clear in my priorities, and that priority is Kathleen Valley,” he added.

While the company’s current strategy is to stay pure play and not diversify to other battery materials outside lithium, that may change in the future, Ottaviano said.

Liontown might consider diversifying along lithium sources, for example from hard rock into brines, he noted, “but the focus today is very much on building Kathleen Valley.”

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.

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