Company Overview: Kidman Resources Limited explores and develops precious and base metals deposits in New South Wales (NSW), Western Australia and Northern Territory. Its other principal activities include development of its Burbanks Gold Project located in Western Australia; acquisition of the Mt Holland asset located in Western Australia, and carrying out all requirements in relation to the acquisition of the Mt Holland Project. It operates in the exploration for base metal and rare earths industry within Australia. The Mt Holland Gold & Lithium project consists of both exploration and resource drilling. The Burbanks Gold Project is situated near Coolgardie, Western Australia. The Browns Reef Project is located close to the township of Lake Cargelligo in central NSW. The Crowl Creek Project is made up of eight exploration licenses located near the township of Condobolin in Central NSW. The Esmeralda Prospect is situated 58 kilometers southeast of the productive Croydon Goldfield in North Queensland.
 

KDR Details

Significant Progress Made, Favourable Outlook For Lithium: Kidman Resources Limited (ASX: KDR) is a small-cap mineral exploration and development company with the market capitalisation of circa $522.19 Mn as of April 10, 2019. It is principally engaged in the exploration and development of Mt Holland Lithium Project which is located near Southern Cross in Western Australia. It is developing Mt Holland Lithium Project in a 50:50 joint venture called Covalent Lithium with Sociedad Quimica y Minera de Chile S.A. (SQM). As per FY 2018 annual report, the company has made significant progress across all aspects of the Mt Holland Lithium Project in the last six months.

With the help of the joint venture entity, Covalent Lithium, the company made progress in a number of key areas including pre-feasibility studies and the declaration of maiden Ore Reserve for Earl Grey lithium deposit. Apart from these, the balance sheet of Kidman resources got strengthened, and the company also sealed offtake arrangements with high quality, investment-grade counterparties. In the month of December, an integrated pre-feasibility study for the Mt Holland Lithium Project was wrapped up, which confirmed that Covalent Lithium could develop an integrated mine-to-refinery project producing refined, battery grade lithium hydroxide. The study demonstrated attractive project economics, including an NPV_10% (nominal) of US$2.2 billion (100%) and IRR of 26.6%. Also, the lithium outlook remains favourable and its demand might be boosted with the help of growing electric vehicle in the market. The company’s strategy of producing refined, battery grade lithium hydroxide might address the demand directly with a premium refined lithium product for global suppliers and manufacturers. In six months ended December 2018, the company generated revenues amounting to $90,262 while, during the same period, its other income was $11,880,359.

As a result, there are expectations that KDR would be aided by the improvement in its cash position, offtake arrangements as well as favourable outlook for lithium. Additionally, the company would be one of the few integrated producers of lithium hydroxide which might act as eye-catcher for the investors. The lithium hydroxide is being used for the fastest growing battery cathodes in the electric vehicle applications.
 

FY 2018 Income Statement (Source: Company Reports)

Recent Developments: In the month of December, Kidman Resources announced a maiden Ore Reserve at Mt Holland’s Earl Grey deposit of 94.2 million tonnes at 1.5% Li2O which confirmed Earl Grey’s status as a globally significant hard-rock lithium deposit and Kidman as a long term, low sovereign risk supplier of lithium hydroxide to the world markets. Kidman Resources had made significant progress with regards to the funding and offtake arrangements which includes offtake arrangements with Mitsui & Co., Ltd., and LG Chem and a US$100 million funding term sheet with the joint venture partner SQM. Kidman Resources changed the financial year end from June 30 to December 31 to align financial year with that of its Mt Holland Lithium Project joint venture partner Sociedad Quimica y Minera de Chile S.A. and JV entity Covalent Lithium Pty Ltd.

Also, the company wrapped up the first stage of debt financing process and there was a receipt of indicative terms from the prospective debt financiers with regards to the potential facility to finance Kidman’s share of capex to construct Mt Holland Lithium Project and associated owners’ costs. The terms which were received confirm significant interest from the leading domestic and international lenders for the conventional project finance and it also supports Kidman’s strategy to maximise debt financing for the project. Coming to the strengthening of balance sheet, there was a receipt of final two joint venture milestone payments from SQM, with US$25 million (A$34.8 million) paid directly to Kidman and US$60 million (A$83.6 million) paid to Covalent Lithium (share of Kidman is 50%).

Finalisation of An Agreement with SQM: Kidman Resources Limited had made an announcement that it had finalised an agreement with SQM for a US$100 million capital expenditure debt facility with interest capitalised at 6-month USD LIBOR plus a margin of 2%. After the final investment decision is made with respect to the Mt Holland Lithium Project, the facility would be available for drawdown. In addition, Kidman and SQM have executed the amendments to Mt Holland joint venture agreement.

The company had also made an announcement that Non-Executive Director, Mr. David Southam, would be resigning from the Board with effect from April 30, 2019. Mr. David Southam was placed as Managing Director of Mincor Resources NL in the month of February 2019 and time doesn’t permit him to undertake both the crucial roles.

Commencement of Strategic Review: Kidman Resources had made an announcement that it had commenced a strategic review of the 100% owned gold and base metals rights at Mt Holland Project. The company has a tenement package with the historic gold endowment, with significant potential for further discovery. The tenement package comprises the Bounty goldfield, which historically produced more than 1.2Moz of gold from 2 underground mines (i.e., Bounty and Bounty North), as well as over ten open pits. In addition to its historical gold endowment, the tenement package also has a significant exploration upside for gold as well as base metals (including nickel ± copper-cobalt-PGE mineralisation within komatiitic cumulate rocks). Besides this, the company's focus is towards the development of its lithium assets, through the Mt Holland Lithium Project. Therefore, it has been determined that while it focuses on its core lithium assets, it would be seeking proposals from the third parties in order to maximise the value of gold and base metal assets at Mt Holland Project in Western Australia for the benefit of shareholders.

Overview of The Offtake Arrangements: Kidman Resources had made significant progress with regards to its strategy to seal offtake arrangements with high-quality counterparties for around 75% of its share of LiOH production (around 22.6kt per annum of LiOH) for initial years of Mt Holland Lithium Project. In the month of November 2018, KDR made an announcement that it entered into the binding heads of agreement with Mitsui & Co., Ltd. for the supply of LiOH. The progress made towards the offtake agreements further builds confidence in the company’s business objectives and, we expect, that it might meet the growing market demand moving forward.

Payments Supported KDR’s Cash Position: Kidman Resources Limited’s cash balance got aided by the payment of SQM’s joint venture milestone payment and at December 31, 2018 stood at $30.9 million. The Company got the final joint venture milestone payments from SQM in the month of December 2018 and KDR stated that the funding would be utilised towards further advancement of Mt Holland Lithium Project. In six months ended December 2018, the current ratio stood at 2.21x with nil borrowing, depicting strong balance sheet position. Hence, we expect that the decent cash balance might support it in making deployments towards the business activities which could help it tapping the opportunities which might arise.


Total Assets as at December 2018 (Source: Company Reports)

What Might Drive Growth For Kidman Resources: In a recent presentation, Kidman Resources stated that the demand for lithium is backed by the rising penetration of electric vehicles, with lithium hydroxide primarily being utilised in the fastest-growing battery types. The strong commitments from the major global automotive original equipment manufacturers are expected to increase the electric vehicle production. The demand for the lithium-ion batteries is anticipated to witness the growth at approximately 30% per annum between 2012 and 2030, with automotive demand being the primary driver.


Strong Demand Outlook (Source: Company Reports)

The company is pursuing the fully integrated Mine & Concentrator and Refinery model in order to produce lithium hydroxide. As an integrated producer, there are anticipations that KDR might capture higher margins by selling the lithium hydroxide that is available to producers of lithium concentrate. Moving forward, Kidman Resources would be focusing towards wrapping up the definitive feasibility study for integrated Mt Holland Lithium Project and proceeding to a final investment decision and progressing to the definitive, binding offtake agreements. However, it would also focus on commencing next stage of the project financing process as well as it would continue to evaluate other marketing opportunities.

Stock Recommendation: The stock of Kidman Resources has been delivering decent returns from the past few months as, in the span of previous six months, the stock posted 33.68% return while, in the time frame of three months, it posted 15.18% return. The company had made significant progress with respect to offtake arrangements as well as funding which might act as a key growth catalyst and can attract the attention of market players. Also, Kidman Resources is well progressed on its strategy which focuses on becoming a low-cost, integrated producer of lithium hydroxide for the growing electric vehicle market. The company stated that SQM happens to be a high-quality joint venture partner and provides support to the project delivery.

Additionally, Kidman Resources is funded when it comes to initial stages of the project capital expenditure, and the offtake arrangements are also providing support for its ongoing bank financing discussions. Further, the company’s stock is trading slightly towards the 52-week lower levels, thereby, providing decent entry levels. Given the backdrop of aforesaid facts and current trading level, we give a “Buy” recommendation on the stock at the current market price of A$1.340 per share (up 3.876% on 10 April 2019).

 
KDR Daily Chart (Source: Thomson Reuters)

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