Liontown Jumps After Striking Lithium Supply Deal with Tesla

Shares of Liontown Resources (ASX:LTR) surged almost 20 percent on Wednesday (February 16) after the ASX-listed lithium junior inked a supply deal with electric car pioneer Tesla (NASDAQ:TSLA).

The move comes as electric vehicle (EV) makers try to secure supply of the essential battery raw material, with lithium demand expected to continue to outpace supply in the coming years.

The legally binding term-sheet agreement will see the Perth-based lithium company supply Tesla with lithium spodumene concentrate from its AU$473 million Kathleen Valley project. The deal is for an initial five year period set to begin in 2024, conditional on Liontown starting commercial production by 2025.

Elon Musk’s Tesla would purchase 100,000 dry metric tonnes (dmt) in the first year, increasing to 150,000 dmt per year in the following years. This represents about one-third of Kathleen Valley’s startup production capacity, which is expected to be about 500,000 tonnes per year with the potential to expand to 700,000 tonnes.

Liontown said pricing will be determined by a formula-based mechanism linked to market prices for lithium hydroxide monohydrate, and will depend on market prices at the time of each shipment.

Prices for spodumene have increased from around US$400 per tonne in 2020 to over US$2,500 in the past year, and most analysts agree lithium prices will remain strong in 2022.

Last year, Liontown struck an offtake deal with battery maker LG Energy Solution (KRX:373220), marking the South Korean company's first binding commitment to acquire Australia-sourced spodumene concentrate.

With Tesla’s deal, Liontown has now contracted over half of its expected production from Kathleen Valley during the first five years of operation.

The project, which is located in Western Australia, has a mineral resource estimate of 156 million tonnes at 1.4 percent lithium oxide and 130 parts per million tantalum pentoxide, with the ore reserve supporting an initial 23 year mine life. In 2021, a definitive feasibility study estimated a post-tax net present value of AU$4.2 billion at an 8 percent discount and internal rate of return of 57 percent.

Construction at Kathleen Valley is expected to start in Q4 2022, with the company saying it is well funded to continue developing the project following a AU$450 million equity raising completed in late 2021.

Aside from Kathleen Valley, Liontown’s second hard-rock lithium project in Western Australia is Buldania, located in the south of the Eastern Goldfields province. The region also hosts the Mount Marion and Bald Hill lithium mines.

With battery metals prices spiking last year, many Australian lithium stocks saw their share prices increase for most of 2021, with some also seeing gains so far in 2022. Nickel, graphite and cobalt stocks moved up as well.

At the end of last year, diverse market watchers agreed that the energy transition will continue to be the main theme for investors in Australia, and the minerals needed for it to become a reality will be the ones to watch.

Speaking with the Investing News Network in January, David Franklyn of Argonaut pointed out that this transition will drive long-term demand for nickel, copper and lithium, among others.

“While there will be volatility along the way as demand and supply mismatch, this is a 10 to 20 year transition and is the cornerstone of resource sector investing,” he said. “Australia has the opportunity to be a green energy powerhouse if it has the political will and foresight, endowed with vast reserves of lithium, nickel, copper, rare earths, uranium and plenty of wind and sun to drive renewable energy production.”

In addition to its deal with Australia's Liontown, US-based Tesla also has deals with ASX-listed BHP (ASX:BHP,LSE:BHP,NYSE:BHP) for nickel and Syrah Resources (ASX:SYR,OTC Pink:SYAAF) for graphite. As of market close on Wednesday, shares of Liontown were trading at AU$1.64.

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Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.