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KIDMAN RESOURCES (KDR)
BLUE OCEAN EQUITIES BLUE OCEAN EQUITIES BLUE OCEAN EQUITIES BLUE OCEAN EQUITIES PTY . LTD.PTY . LTD.PTY . LTD.PTY . LTD.
L29, 88 PHILL IP ST SL29, 88 PHILL IP ST SL29, 88 PHILL IP ST SL29, 88 PHILL IP ST SYDNEY NSW 2000YDNEY NSW 2000YDNEY NSW 2000YDNEY NSW 2000
AFSL 412765 |AFSL 412765 |AFSL 412765 |AFSL 412765 | ABN 53 151 186 935ABN 53 151 186 935ABN 53 151 186 935ABN 53 151 186 935
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KIDMAN RESOURCES (KDR) INITIATION: Could KDR be the best of both worlds?
Our Top Pick in the ASX lithium space
AnalystAnalystAnalystAnalyst
EmailEmailEmailEmail
PhonePhonePhonePhone
DateDateDateDate
Steuart McIntyre
+61 2 8072 2909
20 November 2017
We sayWe sayWe sayWe say PricePricePricePrice TargetTargetTargetTarget Strategic TargetStrategic TargetStrategic TargetStrategic Target
BUY 1.30 2.50 4.00
We believe Kidman has the potential to become a $2-3bn company over the next
few years through its JV with SQM at the Mt Holland integrated lithium project in
WA. The CEO of SQM has also indicated he expects Mt Holland to be at the “low-
end of the cost curve” – a potentially industry changing development… and one
which we believe puts Kidman on track to become the preferred institutional ASX
lithium play over the next few years. KDR is our Top Pick in the ASX lithium space.
SHARE PRICE CHART
FORECAST OPERATING CASHFLOW
COMPANY DATA & RATIOS
Enterprise value $520m
Diluted market cap* $519m
Diluted shares* 400m
Free float 100%
12 month price range $0.34-1.68
GICS sector Materials
Board & Management hold ~1.4% (FD)
*Diluted for 50m options
IMPLIED RETURN
Implied all-in return 92%
THE BEST OF BOTH
WORLDS?
Many institutional investors prefer to
be at the low end of the cost curve,
and in lithium, until now, that meant
investing in a brine project, probably
in South America. KDR’s Mt Holland
JV with SQM has plans to become
the first hard rock lithium play at the first hard rock lithium play at the first hard rock lithium play at the first hard rock lithium play at
the low end of the cost curvethe low end of the cost curvethe low end of the cost curvethe low end of the cost curve and in
Western Australia. Unlike most hard
rock plays, KDR will also produce a
final product and won’t carry Chinese
counter-party risk (see p4).
TIER 1 GRADE, SCALE,
COSTS & JV PARTNER…
The JV is targeting 40ktpa LCE at
Mt Holland initially and we
estimate the operation should
generate EBITDA of ~US$300m
(100%) at a lithium carbonate
price of US$12,000/t. We
estimate the NPV of KDR’s 50%
at A$1.2bn. The JV also has
plans to grow production to 80-
100kt LCE which we believe could
make KDR an A$2-3bn company
over the next few years.
COMPELLING NO MATTER
HOW YOU CUT IT…
For those who believe in the
mainstream adoption of electric
vehicles over the next few years, in in in in
our view our view our view our view leverage to lithium leverage to lithium leverage to lithium leverage to lithium
doesn’t get much better than KDRdoesn’t get much better than KDRdoesn’t get much better than KDRdoesn’t get much better than KDR.
SQM’s endorsement of Mt Holland
carries significant weight, with >20
years experience in lithium, SQM
also brings considerable technical
expertise to the table and an
impressive track record of delivering
projects on time and on budget.
$0.00
$0.50
$1.00
$1.50
$2.00
Nov16 May17 Nov17
KDR ASX 200 (relative) -
100
200
300
FY19 FY20 FY21 FY22 FY23
A$m
Sou rce : IRESS , B l ue Ocean Equ i t i e s Sou rce : Company, B l ue Ocean Equ i t i e s
KIDMAN RESOURCES (KDR)
2222
CONTENTS
INVESTMENT SNAPSHOT 3
Macro: Why Lithium? 3 Stock Specific: Why Kidman Resources? 3 Could Kidman be the best of both worlds? 4
COMPANY OVERVIEW 5
Understanding the JV with SQM 6 Development Timetable 7 Near-term Catalysts 7
A BRIEF INTRODUCTION TO SQM 8
SQM’s Lithium Business 8 SQM – The “Partner of Choice” 9
LITHIUM – A STRONG OUTLOOK 10
Lithium Demand 10 Lithium Supply 11 Lithium Prices 12 Global Lithium Peers 12
EARL GREY MINE & CONCENTRATOR, WA 13
Scoping Study 13 Mineralisation 14 Resource 15 Mining & Processing 15 Infrastructure 16 Deals on adjacent ground with Western Areas 17 Site Visit Highlights 18 Gold mineralisation in Earl Grey overburden 19
LITHIUM CARBONATE / HYDROXIDE REFINERY, WA 20
INVESTMENT PROPOSITION 22
Valuation Assumptions 22 Funding Assumptions 23 Price Target & Rating 24 Strategic Target 24 Key Risks 24 Model Summary: Financials & Valuation 25 Model Summary: Operational Inputs & Free Cash Flow 26
BOARD & MANAGEMENT 27
KIDMAN RESOURCES (KDR)
3333
INVESTMENT SNAPSHOT
MACRO: WHY LITHIUM?
In our view, the macro out look for l i th ium remains strong, primari ly driven by the growing use of
l i th ium batteries through the mainstream adoption of electr ic vehicles and growing use of stat ic
storage in domestic, industr ial and grid applicat ions. We provide more detai l on page 10.
STOCK SPECIFIC: WHY KIDMAN RESOURCES?
In our view, Kidman is on track to become the preferred inst itut ional ASX l ith ium play and the only
ful ly- integrated, 100%-Austral ian-based l ith ium exposure with costs at the low end of the cost
curve. KDR is our Top Pick in the ASX l ith ium space and we expect it to be one of the best
performing ASX l ith ium stocks over the next 12-months as studies land and investors get better
visibi l i ty on the company’s ambit ious plans. Key highl ights of the investment case for KDR include:
• Dist r ic tD is t r ic tD is t r ic tD is t r ic t sca lesca lesca lesca le potent ia lpotent ia lpotent ia lpotent ia l : In our view, the known l ith ium mineral isat ion on Kidman’s ground
has distr ict scale potential, At present it comprises 4 key components:
o The Earl Grey resource: 128mt @ 1.44% L i128mt @ 1.44% L i128mt @ 1.44% L i128mt @ 1.44% L i 2222OOOO – the highest grade undeveloped
l ith ium resource in WA over 100mt
o The Earl Grey Explorat ion Target: 75757575----100mt @ 1.3100mt @ 1.3100mt @ 1.3100mt @ 1.3 ----1.5% L i1.5% L i1.5% L i1.5% L i 2222OOOO (Dec 2016)
o Prel iminary dri l l ing also shows the Earl Grey deposit extends onto the explorat ion
tenements acquired from Western Areas (WSA) in Feb 2017
o KDR also signed a farm-in agreement with WSA in March 2017 to acquire l i th ium
rights for 19 tenements, consolidat ing ownership of the highly prospective
Forrestania Greenstone belt around the world-class Earl Grey l i th ium deposit,
including the Bounty pegmatite (54m @ 1.53% Li2O & 34m @ 1.39% Li2O (see p17))
• Very h igh gradeVery h igh gradeVery h igh gradeVery h igh grade: The Earl Grade resource grade of 1.44% is second only to Greenbushes.
• Very lVery lVery lVery l ow st r ipow st r ipow st r ipow st r ip : The f irst 25 years of mining are expected to have a very low average str ip
rat io of 1.9:1 post pre-str ipping (or 2.3:1 including the pre-str ip).
• JV Partner o f Choice in SQMJV Partner o f Choice in SQMJV Partner o f Choice in SQMJV Partner o f Choice in SQM: SQM is a US$15bn NYSE-l isted chemicals company which
controls 27% of the global l i th ium market, has 300-400 l ith ium customers and has been
producing l ith ium products for over 20 years. SQM’s considerable processing expert ise,
breadth of customer base and considerable balance sheet make it the “Partner of Choice”
in l i th ium.
• “Low“Low“Low“Low----end ofend ofend ofend of the cost curvethe cost curvethe cost curvethe cost curve ”””” : While Kidman & SQM have not yet completed the studies for
the planned refinery, on 24 Aug 2017, on SQM’s quarterly cal l, SQM’s CEO said its JV with
Kidman “wil l be at the low-end of the cost curve”. I f s tudies conf i rm th is object ive, I f s tudies conf i rm th is object ive, I f s tudies conf i rm th is object ive, I f s tudies conf i rm th is object ive,
KKKK idmanidmanidmanidman would be would be would be would be the the the the on lyon lyon lyon ly hard rock p layer in the bot tom end of the g loba l cost curvehard rock p layer in the bot tom end of the g loba l cost curvehard rock p layer in the bot tom end of the g loba l cost curvehard rock p layer in the bot tom end of the g loba l cost curve.
• Safe ju r i sd ict ionSafe ju r i sd ict ionSafe ju r i sd ict ionSafe ju r i sd ict ion : Western Austral ia is widely regarded as one of the best jur isdict ions in
the world to develop mining projects. Many of Kidman’s peers are in much higher r isk
jur isdict ions in South America and Afr ica.
• Exce l lent management team wi th the Exce l lent management team wi th the Exce l lent management team wi th the Exce l lent management team wi th the r ight set o f sk i l l sr ight set o f sk i l l sr ight set o f sk i l l sr ight set o f sk i l l s : On our site visit to Mt Holland
last month, we were impressed by the technical ski l ls of the Kidman operat ional team.
In addit ion, the MD, Mr Mart in Donahue has executed several transformative deals while at
the helm of KDR which have posit ioned the company to become the leader in the ASX
l ith ium space over the next few years.
In our view, in t ime, the market may also begin to recognise Kidman’s JV with SQM as the
best deal to date in the ASX l ith ium space. We elaborate more on this view on page 6.
KIDMAN RESOURCES (KDR)
4444
COULD KIDMAN BE THE BEST OF BOTH WORLDS?
We have been covering the ASX l ith ium space for several years now and bel ieve most ASX l ith ium
juniors have assets which typical ly fal l into one of two broad categories:
But what i f you cou ld cherry p ick the best o f both wor lds?But what i f you cou ld cherry p ick the best o f both wor lds?But what i f you cou ld cherry p ick the best o f both wor lds?But what i f you cou ld cherry p ick the best o f both wor lds?
We bel ieve Kidman has potent ial to be “the best of both worlds”. In our view, Kidman is on track
become the preferred inst itut ional ASX l ith ium exposure over the next 12-months, i f studies can
confirm the integrated Mt Holland l ith ium operat ions in Western Austral ia stack up l ike this:
Source: B lue Ocean Equit ies
*On 24 Aug 2017, on SQM’s quarter ly ca l l , the CEO sa id its JV with Kidman “wi l l be at the low-end of the cost curve”
In short, we bel ieve Kidman is on track become the only major integrated 100%-Austral ian-based
l ith ium exposure on the ASX… and with costs in the bottom half of the cost curve.
If the JV can del iver studies (on both the mine and refinery) which confirm the thesis above, we
bel ieve Kidman’s shares are l ikely to see major inf lows from global inst itut ional investors over the
next few years.
BBBBrinesrinesrinesrines
ProsProsProsPros
- Bottom half of cost curve
- Produces a f inal product
- No Chinese counter-party r isk
ConsConsConsCons
- Complex processing
- Higher capex
- Longer to develop
- South-American sovereign r isk
Hard rockHard rockHard rockHard rock
ProsProsProsPros
- Simple mining / processing
- Lower Capex
- Faster to Develop
- Austral ian sovereign r isk
ConsConsConsCons
- Top half of cost curve
- Produces an intermediate product
- Carry Chinese counter-party r isk
Mt Holland JVMt Holland JVMt Holland JVMt Holland JV
ProsProsProsPros
- Bot tom ha l f o f cost Bot tom ha l f o f cost Bot tom ha l f o f cost Bot tom ha l f o f cost curvecurvecurvecurve ****
- Produces a f inal product
- No Chinese counter-party r isk
- Austral ian sovereign r isk
- Faster to develop (than a brine)
- Simple mining / processing
(again compared to brines)
ConsConsConsCons
- Higher capex (than hard rock,
but ~3x EBITDA per tonne ore)
KIDMAN RESOURCES (KDR)
5555
COMPANY OVERVIEW
Kidman Resources is an ~A$450m market cap l ith ium developer through its 50:50 JV with
Sociedad Quimica y Minera de Chile (SQM), in the world-class Mt Holland integrated l ith ium project
in Western Austral ia.
Locat ion of Kidman’s Mt Hol land l i th ium pro ject in WALocat ion of Kidman’s Mt Hol land l i th ium pro ject in WALocat ion of Kidman’s Mt Hol land l i th ium pro ject in WALocat ion of Kidman’s Mt Hol land l i th ium pro ject in WA
Source: Company
The development plan for the Mt Holland integrated l ith ium project comprises:
- The Earl Grey l i th ium mine and concentrator (MineMineMineMine): Producing ~300ktpa of 6% conc
- A WA-based conversion plant (Ref ineryRef ineryRef ineryRef inery ): Producing ~40ktpa of l ith ium carbonate/hydroxide
Mt Hol land in tegrated l i th ium pro ject , WAMt Hol land in tegrated l i th ium pro ject , WAMt Hol land in tegrated l i th ium pro ject , WAMt Hol land in tegrated l i th ium pro ject , WA
Source: SQM Investor Day, September 2017
A Scoping Study for the development of the Earl Grey l i th ium deposit was completed in October
2017 and further studies are now underway.
At end Sept Kidman had ~A$6m in cash and ~A$6m in debt. KDR also has undrawn convert ible
debt of US$15.5m. On sat isfact ion of the remaining condit ions precedent to the JV with SQM
(expected by end Dec), SQM wil l pay US$5m to Kidman and pay a further US$20m into the JV.
Mt Holland is located
~105km south-southeast
of Southern Cross in WA.
Mt Holland has been
recognised as a project
of State Signif icance by
the government of
Western Austral ia, which
should help expedite
project approvals.
KIDMAN RESOURCES (KDR)
6666
UNDERSTANDING THE JV WITH SQM
Based on our discussions with investors the JV with SQM is general ly not well understood and
somewhat perversely, Kidman’s share price actual ly fel l in the weeks fol lowing the announcement
of the deal!
We bel ieve some investors assessed the deal with SQM ( incorrect ly in our view) l ike this:
• KDR sold 50% of a t ier 1 l i th ium deposit in WA for US$70m, when comparable peers were
being valued at A$500-600m+
But in our view, investors should be looking at the deal l ike this:
• KDR essent ial ly traded half the deposit for the r ight to own half an SQM-run refinery
• Given half the refinery is worth much more than half the deposit, in our view this would have
probably been a great deal on its own (especial ly when the partner is SQM!)
• But SQM also essent ial ly agreed to fund KDR’s share of the mine into product ion…
• …and to provide a short term debt faci l i ty unt i l the JV condit ions are met
In short, in our v iew, th is in our v iew, th is in our v iew, th is in our v iew, th is JV JV JV JV i s a t ransformat i ve dea l for K idman shareholdersis a t ransformat i ve dea l for K idman shareholdersis a t ransformat i ve dea l for K idman shareholdersis a t ransformat i ve dea l for K idman shareholders , which posit ions
the company to become the only major integrated 100%-Austral ian-based l ith ium exposure on the
ASX… target ing costs “at the low-end of the cost curve”. I f studies confirm this cost posit ion, we
bel ieve Kidman wil l be on track to become the leader in the ASX l ith ium space within a few years.
In our view, in t ime, the market may also begin to recognise Kidman’s JV with SQM as the best
deal to date in the ASX l ith ium space.
Terms of the JV w i th SQMTerms of the JV w i th SQMTerms of the JV w i th SQMTerms of the JV w i th SQM
While the chart below provides more detai l on the t iming of JV cash f lows, the simplest explanat ion
is SQM is providing US$110m, comprising:
- US$30m to KDR
- US$80m into the JV to fund the mine
The US$80m in JV funds wil l be spent f irst, after which both part ies wil l contr ibute 50:50 to costs.
Indicat i ve t imetable for JV paymentsIndicat i ve t imetable for JV paymentsIndicat i ve t imetable for JV paymentsIndicat i ve t imetable for JV payments
Source: Company
KIDMAN RESOURCES (KDR)
7777
KDR should KDR should KDR should KDR should now now now now be fu l l ybe fu l l ybe fu l l ybe fu l l y ---- funded to bui ld the minefunded to bui ld the minefunded to bui ld the minefunded to bui ld the mine
The Scoping Study est imated the mine would cost US$111m to bui ld. The US$80m in JV funds
wil l be spent f irst, fol lowed by a 50:50 spl it of the remaining US$31m (i.e. US$15.5m each).
Given SQM wil l be paying US$30m to KDR, assuming there is no material increase in capex in the
Feasibi l ity Study for the mine, KDR should be ful ly funded for its share of mine capex.
SQM SQM SQM SQM Convert ib leConvert ib leConvert ib leConvert ib le DebtDebtDebtDebt
To provide KDR with working capital while the JV condit ions precedent are being sat isf ied (FIRB
approval is the last key condit ion as we understand it ) , SQM also agreed to provide a US$21.5m
convert ible debt faci l i ty at 7% interest.
Any debt drawn is repayable either in cash or at KDR’s elect ion in KDR scrip at 67.8c per share.
The company expects the remaining condit ions precedent to be met by end Dec 2017 and any
debt drawn wil l be repaid by being offset against capital contr ibut ions.
KDR reta ins a l l gold r ights at Mt Hol landKDR reta ins a l l gold r ights at Mt Hol landKDR reta ins a l l gold r ights at Mt Hol landKDR reta ins a l l gold r ights at Mt Hol land
Under the JV with SQM, Kidman retains al l the rights to the Mt Holland gold resource. We discuss
this gold potent ial in more detai l on page 19.
DEVELOPMENT TIMETABLE
As a brownfield operat ion, the permitt ing process for Earl Grey should be less onerous because
the project sits on an approved mining lease and has no nat ive t it le issues.
The key required permit is environmental approval, and ffffol lowing extensive basel ine f lora and
fauna studies, groundwater studies, waste characterisat ion, site planning and 6 months of
consultat ion, the Referral Document was prepared and submitted to permitt ing authorit ies in May
2017. Mt Holland has also been recognised as a project of State Significance by the government
of Western Austral ia, which should help to streamline the permitt ing process.
Our forecasts assume the fol lowing development t imetable for Mt Holland:
• Potent ial for a Resource Upgrade for Earl Grey based on recent dri l l ing, due near-term
• Feasibi l ity Study results for the mine and concentrator completed in Q2 CY18
• Mine & Concentrator bui lt during FY19, f irst l i th ium conc production in 2H CY19
• Refinery studies and permitt ing in paral lel during FY19
• Refinery bui lt during FY20, f irst product ion in 2H CY20
NEAR-TERM CATALYSTS
In our view the key near term de-risking milestones for Kidman are:
• Confirmation that al l condit ions precedent to the JV have been met. As we understand it
the f inal key condit ion is FIRB approval which is expected by end Q4 CY17.
• Complet ion of mine and concentrator opt imisat ion studies in Q2 CY18.
• Complet ion of the refinery study in 2H CY18. SQM has f lagged it bel ieves the integrated Mt
Holland operat ion wil l be in the bottom half of the cost curve – completion of the refinery
study wil l probably be the f irst t ime the l ikely cost profi le of the refinery is reported, which
we bel ieve wil l make it a very important milestone for investors.
KIDMAN RESOURCES (KDR)
8888
A BRIEF INTRODUCTION TO SQM
SQM is a ~US$15bn Chilean-based chemicals company l isted on the NYSE (SQM).
At 30 June 2017, SQM had cash of US$518m and debt of ~US$1.2bn most of which is at a very
low effect ive interest rates of ~0.74-1.5%. i.e. SQM has a strong balance sheet and access to
cheap debt.
The sl ide below from SQM’s latest quarterly presentat ion provides a useful overview of the
company’s key businesses, the substant ial EBITDA of ~US$850m at impressive margins of over
40%. It also highl ights li th ium as the biggest contr ibutor to gross profit over the past 12-months,
represent ing over 60%.
Source: SQM quarter ly earn ings presentat ion, 23 August 2017
SQM’S LITHIUM BUSINESS
SQM speaks for ~27% of global l i th ium production with sales volumes over the last 12-months of
~51kt and l ith ium revenue of US$592m. SQM is also the world’s lowest-cost l ith ium producer
through the Salar de Atacama operat ion in Chile.
SQM’s l i th ium’s production capacity is:
- Lithium Carbonate: 48ktpa in 2017 expanding to 63ktpa in 2018 (capex ~US$50m)
- Lithium Hydroxide: 6ktpa in 2017 expanding to 13.5ktpa in 2018 (capex ~US$30m)
SQM’s key l i th ium development assets are:
- Minera Exar JV in Argent ina: 25ktpa production to begin in Q3 2019 (capex ~US$430m).
Total capacity 50ktpa (Total capex ~US$675m)
- Mt Holland JV in Australia: 40ktpa of LCE ( l i th ium conc production in 2019, product ion of
l i th ium carbonate and l ith ium hydroxide in 2H 2020).
Over the 12-months to
June 2017 SQM generated:
- US$2.1bn in Revenue
- US$853m in EBITDA
- EBITDA margin of 41%
L i th iumLi th iumLi th iumLi th ium Cont r ibut ion:Cont r ibut ion:Cont r ibut ion:Cont r ibut ion:
- 29% of Revenue
- 61% of Gross Profit
KIDMAN RESOURCES (KDR)
9999
SQM – THE “PARTNER OF CHOICE”
Kidman describes SQM as the “Partner of Choice” and we would strongly agree with that
assessment.
SQM has been producing l i th ium carbonate for ~24 years and one of the SQM executives told us
the company essent ial ly invented battery grade l ith ium carbonate and created the market.
On our site visit to Mt Holland in October, one of the attending SQM executives told us that SQM:
- Sells 26 different l i th ium products;
- Has 300-400 l ith ium customers around the world
With SQM as its JV partner, KDR:
- Should be able to access much cheaper debt (at the JV level)
- Has no need to sign offtake agreements, as it can simply use SQM as its market ing agent
for its 50% share, to sell l i th ium products directly into SQM’s established customer network
- These advantages material ly reduce the f inancing r isk for KDR (and should also be faster)
While SQM does not have any exist ing spodumene conversion faci l it ies in operat ion, SQM believes
there are 9 primary ski l l sets required to successful ly develop the integrated l ith ium operat ion at Mt
Holland… and as per the sl ide below, SQM believes it has the required expert ise in 8 out of 9 of
these ski l l sets (out l ined in green).
The only area where SQM does not regard itself as an expert is in Calcinat ion and Leaching
(out l ined in blue) where has only ~2 years of experience, but it is developing further experience.
We bel ieve SQM may decide to hire addit ional special ised personnel to bolster its expert ise in this
area.
Source: SQM Investor Day, September 2017
SQM’s expert ise in l i th ium processing is well-establ ished over more than 20 years. It has 50
process engineers in its Process Team, who focus on cont inuous improvement and ensure each
project is tai lor made.
SQM’s project team has 50 engineers and more than US$1.4bn of successful ly del ivered projects
with an on-t ime and on-budget track record.
KIDMAN RESOURCES (KDR)
1 01 01010
LITHIUM – A STRONG OUTLOOK
In our view, the macro out look for l i th ium remains strong, primari ly driven by the growing use of
l i th ium batteries through the mainstream adoption of electr ic vehicles and growing use of stat ic
storage in domestic, industr ial and grid applicat ions.
Given SQM has been producing l i th ium products for over 20 years, has 300-400 l ith ium customers
and controls 27% of the l i th ium market, we take the view that it is in a much stronger posit ion than
us to assess the current supply/demand picture. As such, in the sect ion below we present the
highl ights on SQM’s outlook for l i th ium from its Investor Day in New York in September 2017.
On 12 September 2017On 12 September 2017On 12 September 2017On 12 September 2017, when Kidman executed its JV with SQM for Mt Holland, the CEO of SQM, the CEO of SQM, the CEO of SQM, the CEO of SQM,
Pat r ic io de Solmin ihac sa id “The out look for l i th ium has never been st ronger” .Pat r ic io de Solmin ihac sa id “The out look for l i th ium has never been st ronger” .Pat r ic io de Solmin ihac sa id “The out look for l i th ium has never been st ronger” .Pat r ic io de Solmin ihac sa id “The out look for l i th ium has never been st ronger” .
LITHIUM DEMAND
According to SQM’s estimates, l ith ium demand in 2017 is expected to be ~208kt of Lithium
Carbonate Equivalent (LCE), with energy storage expected to account for 58% of demand.
Source: SQM Investor Day, September 2017
Looking ahead, in the slide below SQM outl ines a number of potent ial demand scenarios, based on
electr ic vehicle penetration rates by 2025 ranging from 8-12%.
Bot tom l ineBot tom l ineBot tom l ineBot tom l ine: At the top end, SQM sees potent ial for l i th ium demand to quadruple by 2025!
Source: SQM Investor Day, September 2017
KIDMAN RESOURCES (KDR)
1 11 11111
LITHIUM SUPPLY
According to SQM’s estimates, the primary sources of l i th ium supply in 2017 are ~50% from brines
in South America (Chile and Argent ina), ~40% from hard rock sources in Austral ia and a relat ively
modest 8% of supply coming from China.
Source: SQM Investor Day, September 2017
According to SQM, most of the new l i th ium projects are based in Aust ra l ia (11) and Argent ina (7):
Source: SQM Investor Day, September 2017
Interest ingly, in the unl ikely event all of these projects get bui lt and achieve ful l product ion by 2025
( including the 325kt in the “possible” category), supply wil l only just meet the 12% EV penetrat ion
scenario out l ined by SQM (see bottom of previous page), which SQM predicts would require a
supply of ~800ktpa LCE of by 2025 (current supply 208kt LCE + all these projects 607kt LCE).
KIDMAN RESOURCES (KDR)
1 21 21212
LITHIUM PRICES
The chart below shows l ith ium prices over the past two years. The two most important l ines on
this chart for Kidman are:
- The spot price for battery grade l ith ium carbonate (99.5%): ~US$19,000/t
- SQM’s average contract price (for a range of products): ~US$13,500/t
Battery-grade l ith ium hydroxide is not shown on this chart, but typical ly sel ls at a premium to
battery grade l ith ium carbonate and we are told the spot price is ~US$20,000/t at present.
L i th ium Pr ices over the last ~2 yearsL i th ium Pr ices over the last ~2 yearsL i th ium Pr ices over the last ~2 yearsL i th ium Pr ices over the last ~2 years
Source: P i lbara Minera ls, As ian Meta ls, Company reports
GLOBAL LITHIUM PEERS
All of the serious players in l ith ium are integrated and as the chart below highl ights, for investors
looking for l ith ium exposure, the three key opt ions are typical ly:
• A major chemicals conglomerate – not a pure l i th ium exposure
• A brine play – comes with complex processing + South American sovereign r isk
• A hard rock play – not integrated, Chinese counter-party r isk, top half of the cost curve
We be l ieve K idman is We be l ieve K idman is We be l ieve K idman is We be l ieve K idman is on t rackon t rackon t rackon t rack to become the best o f both wor ldsto become the best o f both wor ldsto become the best o f both wor ldsto become the best o f both wor lds (see p4)
G loba l G loba l G loba l G loba l LLLL i th ium i th ium i th ium i th ium PPPP rojectsrojectsrojectsrojects
Source: Company, Data compi led f rom Rosk i l l (2016) and Signumbox (2016) Reports
KIDMAN RESOURCES (KDR)
1 31 31313
EARL GREY MINE & CONCENTRATOR, WA
SCOPING STUDY
In October 2017, Kidman released a Scoping Study for the development of the Earl Grey mine and
concentrator. It is important to note that the Scoping Study f igures below do not contain the
future benefits SQM is expected to bring to the project. A Feasibi l ity Study including these
benefits is underway and some of the potent ial project improvements have already been provided
in the company’s presentat ions.
The table below summarise the Scoping Study results as well as some of the pre-released f igures
being targeted in the advanced Feasibi l i ty Study:
Ear l Grey Ear l Grey Ear l Grey Ear l Grey mmmmine & ine & ine & ine & cccconcent ratoroncent ratoroncent ratoroncent rator Scop ing StudyScop ing StudyScop ing StudyScop ing Study
Oct 2017Oct 2017Oct 2017Oct 2017 Feas ib i l i ty StudyFeas ib i l i ty StudyFeas ib i l i ty StudyFeas ib i l i ty Study
UnderwayUnderwayUnderwayUnderway
Capex US$111m Lower?
Str ip rat io 2.3:1
1.9:1 post pre-str ip
Plant throughput 2mtpa 1.5mtpa?
Head grade (Li2O) 1.4%
Recovery 60% 80-86%
Lithium production (6% conc) 288ktpa
C1 Cash Cost US$205/t Lower?
Source: Company
The Scoping Study also included f inancial outcomes for an operat ion export ing concentrate. As
this is now longer the plan, we have omitted those outcomes from this report.
After the release of the Scoping Study, both SQM and Kidman’s investor presentat ions have hinted
at much higher potent ial recoveries from the concentrator… which could mean:
- Lower cash costs?
- A smaller plant? Say 1.5mtpa to produce the same volume of concentrate?
- Lower capex?
Time wil l tel l , but needless to say, i f h igher recoveries are confirmed in the Feasibi l i ty Study due by
end Q2 CY18, we see scope for material improvement in a number of areas.
Source: Company
The Scoping Study was based on
a product ion target of 47mt – a
very modest 37% of the 128mt
resource.
Of the in it ial 25 year mine l i fe
out l ined in the Scoping Study, the
f irst 20 years wil l come exclusively
from Indicated resources.
KIDMAN RESOURCES (KDR)
1 41 41414
MINERALISATION
The Earl Grey mineral isat ion is hosted by three pegmatite si l ls which are typical ly 900m wide, and
dip north at around 15 degrees over 1,400m in str ike length. The hangingwall and main pegmatites
outcrop at surface and al l three pegmatites display geological cont inuity to 300 m depth from
surface at the northern end of the deposit. The main pegmatite varies in thickness from 15-50m
over the length of the deposit.
Source: Company
Source: Company
The primary l ith ium-bearing minerals in the pegmatites are predominately spodumene and petal ite
with trace amounts of eucrypt ite (see table below for more detai l ). The Scoping Study production
target produces 76% spodumene, 13% mixed (spodumene plus petal ite) and 11% petal ite.
The Mt Holland JV wil l be preferent ial ly target ing the spodumene ore for the refinery, simply
because it has much higher Li2O grades (~8% vs. 4.9% in petal ite) – in essence its higher grade
ore. The petal ite may be stockpiled for refin ing later in the same way low grade ore is stockpiled
in other mining operat ions.
Source: Austra l ian Inst itute of Geosc ient ists Journa l, a ig journa l.a ig.org.au
KIDMAN RESOURCES (KDR)
1 51 51515
RESOURCE
Kidman released its maiden resource at Earl Grey on 5 December 2016, as set out below:
Ear l GreyEar l GreyEar l GreyEar l Grey Resource Resource Resource Resource DecemberDecemberDecemberDecember 2016201620162016
Source: Company
In the same release, Kidman also released an Explorat ion Target of 75-100mt @ 1.3-1.5% where
the Earl Grey deposit is known to extend be low the h istor ic waste dumpbelow the h istor ic waste dumpbelow the h istor ic waste dumpbelow the h istor ic waste dump from the Earl Grey gold
deposit as well as downdowndowndown----d ipd ipd ipd ip .
One of the dri l l holes within the explorat ion target includes 82m @ 1.56% L i82m @ 1.56% L i82m @ 1.56% L i82m @ 1.56% L i 2222O f rom 264mO f rom 264mO f rom 264mO f rom 264m.
The Explorat ion Target at Earl Grey is provided below:
Source: Company
MINING & PROCESSING
Mining at the Earl Grey pit wil l be undertaken by low technical r isk convent ional open pit mining
using a dri l l ing and blast ing and a truck and shovel operat ion. While the Scoping Study only
examined a Stage 1 pit comprising 47mt @ 1.4% with a 25 year mine l i fe an opt imisat ion was a lso an opt imisat ion was a lso an opt imisat ion was a lso an opt imisat ion was a lso
undertaken on the ent i re pub l i shed resource, lead ing to a undertaken on the ent i re pub l i shed resource, lead ing to a undertaken on the ent i re pub l i shed resource, lead ing to a undertaken on the ent i re pub l i shed resource, lead ing to a potent ia l potent ia l potent ia l potent ia l min ingmin ingmin ingmin ing inventory 109mt @ inventory 109mt @ inventory 109mt @ inventory 109mt @
1.4% at a 1.4% at a 1.4% at a 1.4% at a very compet i t i ve very compet i t i ve very compet i t i ve very compet i t i ve l i fe o f mine st r ip rat io of 3.0l i fe o f mine st r ip rat io of 3.0l i fe o f mine st r ip rat io of 3.0l i fe o f mine st r ip rat io of 3.0 ----3.2:1 and an impl ied mine l i fe o f ~55 3.2:1 and an impl ied mine l i fe o f ~55 3.2:1 and an impl ied mine l i fe o f ~55 3.2:1 and an impl ied mine l i fe o f ~55
yearsyearsyearsyears !!!! (at a processing rate of 2mtpa)
The concentrator at Earl Grey wil l set next to the pit and wil l employ low risk convent ional
processing techniques. The Scoping Study examined a 2mtpa concentrator containing a three-
stage crushing circuit , primary dense media separat ion (DMS) plant, a secondary DMS circuit ( for
f ines) and a f lotat ion plant to treat the high grade middlings from the second stage DMS.
The JV is working on a Feasibi l ity Study on the mine and concentrator and has f lagged potent ial
for signif icant improvement in recoveries from 60% to 80%+. This would mean a smaller 1.5mtpa
plant (vs. 2mtpa) could potent ial ly produce the same volume of concentrate (~288ktpa).
Us ing the potent ia l min ing inventory of 109mt f l agged above, an improvement in concent rator Us ing the potent ia l min ing inventory of 109mt f l agged above, an improvement in concent rator Us ing the potent ia l min ing inventory of 109mt f l agged above, an improvement in concent rator Us ing the potent ia l min ing inventory of 109mt f l agged above, an improvement in concent rator
recover ies f rom 60% to 80%+ cou ld increase the mine l i fe to a lmost 73 years !recover ies f rom 60% to 80%+ cou ld increase the mine l i fe to a lmost 73 years !recover ies f rom 60% to 80%+ cou ld increase the mine l i fe to a lmost 73 years !recover ies f rom 60% to 80%+ cou ld increase the mine l i fe to a lmost 73 years ! (at a processing
rate of 1.5mtpa)…without including the Explorat ion Target or any further explorat ion success!
KIDMAN RESOURCES (KDR)
1 61 61616
INFRASTRUCTURE
Earl Grey is a l ith ium deposit located within Kidman’s Mt Holland gold and l ith ium tenements. The
project is located ~105km south-southwest of Southern Cross in the Yi lgarn Mineral Field in
Western Austral ia. As a brownfield operat ion it very fortunate to have good access to substant ial
exist ing infrastructure.
Road Road Road Road AccessAccessAccessAccess: The Earl Grey project is accessible via the sealed National Highway 1 (Great
Eastern Highway) from Perth to Southern Cross. The balance of the tr ip is along a well maintained
gravel road.
A i rs t r ipA i rs t r ipA i rs t r ipA i rs t r ip : In addit ion to ut i l is ing labour from the local area, the Earl Grey project wil l operate a f ly-
in/f ly-out workforce. Kidman wil l re-furbish and ut i l ise the exist ing Mt Holland airstr ip, located
within the Mt Holland site. The Mt Holland airstr ip is in very good condit ion and wil l be upgraded at
minimal cost to in it ial ly al low regular servicing by 19 seat charter f l ights from Perth.
WaterWaterWaterWater : The Earl Grey project is l ikely to require approximately 1.0-1.5 GL of water p.a. There is an
exist ing borefield located approximately 8 km southeast of the accommodation vi l lage which has 7
product ion bores.
In addit ion there is a large stored volume of water within the nearby Bounty Underground mine
workings (now abandoned). When Bounty was ful ly developed recorded water inf lows were
approximately 28l/sec.
Kidman proposes to refurbish the exist ing borefield and wil l apply for a new groundwater l icence.
PowerPowerPowerPower: The site is current ly
connected to the Western
Power grid via a 132KV l ine
coming in from Moorine Rock.
Kidman plans to generate
power for the new processing
plant on site using diesel
generators. The 2mtpa
processing plant load is
est imated to be 7MW.
Accommodat ionAccommodat ionAccommodat ionAccommodat ion CampCampCampCamp: During
the construct ion phase of the
Earl Grey project, the
explorat ion camp which already
has a capacity of 24 rooms with
ablut ions wil l be upgraded and
expanded then ut i l ised for a
period of one year as a
construct ion camp. A
permanent accommodation
vi l lage has been included in the
Earl Grey project planning with
a maximum capacity for a
planned 200-person workforce.
KIDMAN RESOURCES (KDR)
1 71 71717
DEALS ON ADJACENT GROUND WITH WESTERN AREAS
In early 2017, Kidman struck two deals with Western Areas (an ASX l isted nickel producer,
ASX:WSA) to grow its l i th ium explorat ion footprint around the Earl Grey deposit:
1) On 28 February 2017, Kidman acquired two explorat ion l icences adjacent to Earl Grey from
WSA. Pre l iminary dr i l l ing shows the Ear l Grey l i th ium deposi t extends Pre l iminary dr i l l ing shows the Ear l Grey l i th ium deposi t extends Pre l iminary dr i l l ing shows the Ear l Grey l i th ium deposi t extends Pre l iminary dr i l l ing shows the Ear l Grey l i th ium deposi t extends onto th is groundonto th is groundonto th is groundonto th is ground.
The addit ional tenements also provide Kidman with more space to opt imise the planned
layout of the Mt Holland l ith ium mine and concentrator. WSA retains al l n ickel r ights.
The purchase price comprised:
- A$6m in KDR scrip (11.1m shares with a 12-month escrow); plus
- A gross 1.5% revenue royalty on any l i th ium production; plus
- KDR wil l pay WSA A$150 per contained Li2O tonne reserve defined on this ground
2) On 20 March 2017, Kidman signed a farm-in deal with WSA to acquire l i th ium rights on 19
tenements, consol idat ing ownersh ip of the h igh ly prospect i ve Forrestan ia Greenstone consol idat ing ownersh ip of the h igh ly prospect i ve Forrestan ia Greenstone consol idat ing ownersh ip of the h igh ly prospect i ve Forrestan ia Greenstone consol idat ing ownersh ip of the h igh ly prospect i ve Forrestan ia Greenstone
be l tbe l tbe l tbe l t aaaa round theround theround theround the wor ldwor ldwor ldwor ld ----c lass Ear l Grey l i th ium depos i tc lass Ear l Grey l i th ium depos i tc lass Ear l Grey l i th ium depos i tc lass Ear l Grey l i th ium depos i t ( farm-in tenements in yel low below).
These tenements include the Bounty pthe Bounty pthe Bounty pthe Bounty pegmat i teegmat i teegmat i teegmat i te which straddles the Kidman-Western Areas
boundary; Assays from dri l l ing on Kidman’s side include several impressive hits:
- 54m @ 1.53% Li2O
- 34m @ 1.39% Li2O
Under this farm in agreement, KDR
issued WSA 6.3m shares escrowed
for 6-months.
At the conclusion of both of these
deals, WSA held a 5.2% stake in
KDR. WSA was also given the r ight
to appoint a non-executive director
to the KDR board, and on 24 July
2017, David Southam was
appointed.
FarmFarmFarmFarm---- in Termsin Termsin Termsin Terms
- Stage 1Stage 1Stage 1Stage 1: KDR to earn 50%
by spending A$5m over 3
years, and a minimum of
A$1.5m in year 1
- On complet ion of Stage 1,
WSA has r ight to co-
contr ibute 50:50 on further
explorat ion.
- Stage 2Stage 2Stage 2Stage 2: If WSA elects not to co-contr ibute at the end of Stage 1, KDR may elect to
spend a further A$4m over 2 years to earn 70%. WSA is then free carr ied to a
decision to mine.
The Mt Holland JV also has the r ight to explore for and mine l i th ium on other tenements held by
Kidman in the Mt Holland area.
KIDMAN RESOURCES (KDR)
1 81 81818
SITE VISIT HIGHLIGHTS
The pictures below were taken during our site visit to Mt Holland in October 2017. The site visit
was well attended, with 8 inst itut ional investors in attendance as well as key Kidman personal and
two SQM executives. The t ime we spent on site with the SQM executives left l i tt le doubt in our
minds about SQM’s views on the compell ing potent ial of Mt Holland, and their commitment to
pursuing development as quickly as possible.
Above: A typica l road and terra in at Mt Hol land. Be ing Above: The o ld gold plant at Mt Hol land. Most of th is w i l l a brownf ie lds operat ion means much of the required be p lant w i l l be removed to make way for the new l i th ium in f rast ructure is a l ready in p lace. concentrator.
Above: The h istor ic Ear l Grey gold pi t . Cleary very Above: A diamond dr i l l r ig we drove past at Ear l Grey competent rock. T iny by compar ison to the planned l i th ium pit .
Above: Some wide diameter core with white spodumene Above: The Chi lean f lag f ly ing on the waste dump at crysta ls c lear ly v is ib le. Ear l Grey. Apparent ly the Kidman team v is ited SQM’s operat ions in Chi le and were welcomed by an Austra l ian f lag. So the Kidman team dec ided to return the favour. We were a lso to ld the JV with Kidman represents the f i rst investment in Aust ra l ia by a Chi lean min ing company.
KIDMAN RESOURCES (KDR)
1 91 91919
GOLD MINERALISATION IN EARL GREY OVERBURDEN
The Mt Holland project was previously known as the Bounty Gold mine which operated between
1988 and 2001. One of the interest ing features of the Earl Grey l ith ium deposit is the fact there is
gold mineral isat ion in the overburden, as i l lustrated in the picture below.
Given this material wil l be mined anyway, Kidman may decide to ident ify zones of gold
mineral isat ion as mining progresses with a view to tol l-treat ing gold-bearing ore through a third
party mil l or stockpil ing it for monetisat ion at a later date.
While we bel ieve this opt ion has the potent ial to be meaningful, Kidman’s primary focus at present
is f irmly on developing its l ith ium assets.
In the JV signed with SQM, Kidman retained the r ights to any gold found at Mt Holland.
Source: Company
KIDMAN RESOURCES (KDR)
2 02 02020
LITHIUM CARBONATE / HYDROXIDE REFINERY, WA
Lithium concentrate from the Earl Grey mine wil l be trucked to the refinery to be converted into
either l i th ium carbonate or l i th ium hydroxide. The refinery is being designed with the f lexibi l ity to
produce either product depending on the needs of customers.
F lex ib i l i ty to produce w i th L i th ium Carbonate or L i th ium Hydrox ideF lex ib i l i ty to produce w i th L i th ium Carbonate or L i th ium Hydrox ideF lex ib i l i ty to produce w i th L i th ium Carbonate or L i th ium Hydrox ideF lex ib i l i ty to produce w i th L i th ium Carbonate or L i th ium Hydrox ide
Source: Company
The potent ial product ion capacity for stage one is:
- 44ktpa of l i th ium hydroxide; or
- 37.8ktpa of l ith ium carbonate
SQM has technical knowledge and proprietary designs for a refinery that can produce a mix of
both hydroxide and carbonate. Feasibi l i ty studies for the refinery are underway with Hatch
retained and managed by SQM. These refinery studies are “well advanced”.
The f low chart below provides the refinery concept at Mt Holland:
Source: Company
KIDMAN RESOURCES (KDR)
2 12 12121
SEVERAL POTENTIAL LOCATIONS
Based on proximity to infrastructure, there are three potent ial locat ions being assessed for the
locat ion of the refinery – Kemerton, Mungari and Kwinana, as shown below:
Source: Company
Studies examining the opt imal locat ion for the refinery are well advanced and the outcomes wil l be
confirmed in due course.
KIDMAN RESOURCES (KDR)
2 22 22222
INVESTMENT PROPOSITION
This sect ion provides an overview of our valuation assumptions for Kidman Resources.
VALUATION ASSUMPTIONS
Our valuat ion of Kidman is based on the Mt Holland JV building a mine and concentrator producing
~288ktpa of 6% l ith ium concentrate and a refinery producing ~40ktpa of l i th ium carbonate.
Va luat ion of the mine & concent ratorVa luat ion of the mine & concent ratorVa luat ion of the mine & concent ratorVa luat ion of the mine & concent rator
Our valuat ion assumes:
- a 2mtpa operat ion is bui lt for in it ial capex of US$111m (KDR only has to fund US$15.5m1)
- producing 288ktpa of 6% Li conc p.a.
- at an al l- in cost of ~US$260/t
- which is sold for export for US$650/t (while the refinery is being bui lt )
- generat ing post tax proceeds in year 1 of US$82m (KDR’s share US$41m)
- After year 1, we assume the mine sel ls to the refinery at cost ( i .e. mine cash f low is zero)
- This means the KDR’s share of the NPV of the mine is ~US$21m… in essence the
wholesale cost of l i th ium concentrate f lows through to the low opex in the refinery.
Va luat ion of the Va luat ion of the Va luat ion of the Va luat ion of the re f ineryre f ineryre f ineryre f inery
No studies have been released for the refinery at this stage, so our refinery valuat ion assumptions
are based on Blue Ocean est imates. Our valuation of the refinery assumes:
- In it ial capex of US$400m
- producing 40ktpa of l ithium carbonate for 30+ years
- With opex of ~US$4,000-5,000/t LCE2
- Which at ~US$12,000/t generates:
o an operat ing margin of ~US$300m p.a. (KDR’s share US$150m p.a.)
o a post-tax IRR of 51%
o and an NPV10 of US$1.6bn of A$2.2bn (KDR’s share A$1.1bn)
We apply a 30% discount to our NPV for KDR’s share unt i l studies confirm the refinery’s capex
and opex.
Va luat iVa luat iVa luat iVa luat i on of on of on of on of the expans ion of Mt Hol landthe expans ion of Mt Hol landthe expans ion of Mt Hol landthe expans ion of Mt Hol land (both the mine and the refinery)
While the f igures above are eye-watering, Mt Holland is a Tier 1 asset and based on the exist ing
resource is scaleable to much higher product ion rates. The Mt Holland JV has plans to expand
production to 80-100ktpa of LCE longer term.
On our est imates the expansion case can add another A$900-1,000m to our valuat ion of KDR’s
share! We apply a heavy 80% discount to our NPV for the expanded case unt i l studies provide
more confidence in the refinery capex and opex.
1 Since SQM funds the first US$80m and funding is shared 50:50 thereafter.
2 On 24 Aug 2017, on SQM’s quarterly call, SQM’s CEO said its JV with Kidman “will be at the low-end of the cost curve”
KIDMAN RESOURCES (KDR)
2 32 32323
FUNDING ASSUMPTIONS
On our est imates, assuming there is no material increase in the capex of the mine and
concentrator, SQM’s JV payments should cover KDR’s share of capex. i.e. We bel ieve KDR should
be ful ly funded to bui ld the mine and concentrator, as set out in the table below:
Funding the Funding the Funding the Funding the Mt Hol landMt Hol landMt Hol landMt Hol land MineMineMineMine & Concent rator& Concent rator& Concent rator& Concent rator
Funding UsesFunding UsesFunding UsesFunding Uses USUSUSUS$m$m$m$m Funding SourcesFunding SourcesFunding SourcesFunding Sources USUSUSUS$m$m$m$m
In it ial capex 111 SQM init ial payment into JV 80
Working capital + other costs 19 SQM’s 50% share of equity 25
KDR’s 50% share of equity 25
Debt -
Tota lTota lTota lTota l 130130130130 Tota lTota lTota lTota l 130130130130
Source: Company, Blue Ocean estimates
We expect the mine and concentrator to be bui lt during FY19 and the refinery to be bui lt during
FY20. We are very confident the refinery wil l support at least US$250m of debt, which would leave
each JV partner to fund their 50% share of equity – on our forecasts ~US$100m each:
Funding the Funding the Funding the Funding the Ref ineryRef ineryRef ineryRef inery
Funding UsesFunding UsesFunding UsesFunding Uses USUSUSUS$m$m$m$m Funding SourcesFunding SourcesFunding SourcesFunding Sources USUSUSUS$m$m$m$m
In it ial capex 400 Debt 250
Working capital + other costs 50 SQM’s 50% share of equity 100
KDR’s 50% share of equity 100
Tota lTota lTota lTota l 450450450450 Tota lTota lTota lTota l 450450450450
Source: Company, Blue Ocean estimates
Given the mine and concentrator should be up and running by the end of FY19, we bel ieve Kidman
may be able to sel l the first 12-months of l i th ium concentrate product ion (being produced while the
refinery is being bui lt ) to fund a meaningful port ion of the required US$100m to bui ld the refinery.
Alternat ively, KDR may also be able to forward sel l i ts share of refinery product ion.
But bot tom l ine, on the bas is of th is analys is, KDR appears to be wel l funded for at l east the But bot tom l ine, on the bas is of th is analys is, KDR appears to be wel l funded for at l east the But bot tom l ine, on the bas is of th is analys is, KDR appears to be wel l funded for at l east the But bot tom l ine, on the bas is of th is analys is, KDR appears to be wel l funded for at l east the
next 18 monthsnext 18 monthsnext 18 monthsnext 18 months, with a US$5m payment from SQM due by end December 2017 and a further
US$25m cash payment due by the end of Q2 CY18 on the decision to mine.
KIDMAN RESOURCES (KDR)
2 42 42424
PRICE TARGET & RATING
Our $2.50 Price Target is for Kidman is based on:
• An NPV for the integrated Mt Holland operat ion producing 40ktpa of LCE using a long term
l ith ium carbonate price of US$12,000/t and a 10% nominal discount rate
• We risk-adjust our NPV for Mt Holland by applying a 30% discount for development r isks
ahead and unt i l studies confirm the capex and opex the mine and refinery.
• We have also calculated an expanded case for Mt Holland, which we bel ieve is highly l ikely
longer term, but for now we have applied a material 80% discount to our NPV of the
expansion.
We rate Kidman a high convict ion Buy and our $2.50 Price Target represents an implied return of
over 92%.
STRATEGIC TARGET
We derive our $4.00 Strategic Target for Kidman based on the same scenario set out above but
we have reduced the discounts applied to our NPV.
Our $4.00 Strategic Target represents an implied return of over 200%. It is important to note that
our Strategic Target does not reduce our discounts to NPV to zero (which would increase our price
target to over $5.00!). It also does not account for higher l i th ium price scenarios or for further
explorat ion success (which we bel ieve is highly l ikely! ) .
We also bel ieve KDR holds considerable corporate appeal and once Mt Holland is permitted and in
construct ion, we bel ieve there is a chance SQM may consolidate its ownership of Mt Holland and
bid for Kidman. We also wouldn’t rule out another l i th ium player bidding for Kidman at some point
given the scale and quality of its Mt Holland project and the high cal ibre of its joint venture partner.
KEY RISKS
Kidman is exposed to al l the normal r isks associated with developing and operat ing mining
projects, including permitt ing, funding and construct ion r isks.
Assuming Kidman makes the transit ion into product ion, its revenues will be predominately derived
from the sale of l i th ium carbonate and l ith ium hydroxide. Fluctuat ions in the prices of these
products as well as the Austral ian dollar could impact the company’s reported cash f low,
profitabi l ity and share price.
As Kidman’s Mt Holland project is based in Western Austral ia, an investment in Kidman also
carr ies Austral ian sovereign r isk. However, it is worth not ing that Austral ia is considered material ly
lower sovereign r isk than some of the other jur isdict ions which host l i thium projects, South
America (Chile and Argent ina) and Afr ica.
KIDMAN RESOURCES (KDR)
2 52 52525
MODEL SUMMARY: FINANCIALS & VALUATION
Source: Company data, B lue Ocean Equit ies
Stock Details Enterprise Value $520m
Recommendation: BUY Diluted MCap $519m
Target $2.50 Share Price $1.30 Strategic Target $4.00 Diluted Shares 400m
NAV $2.54 52 Week High $1.68 Implied Return to ST 208% Free Float 100%
Implied Return 92% 52 Week Low $0.34 Avg Daily Value $2.2m
Macro Assumptions FY17E FY18E FY19E FY20E FY21E Ratio Analysis FY17E FY18E FY19E FY20E FY21E
Exchange Rate (A$/US$) 0.75 0.76 0.75 0.74 0.73 Diluted Shares m 381 405 501 501 501
Lithium Carbonate Price 12,125 12,750 12,000 12,000 12,000 EPS - Diluted Ac (1.4) (1.8) (1.4) 8.9 25.0
P/E x n.m. n.m. n.m. 14.6x 5.2x
CFPS - Diluted Ac (2.6) (1.7) (1.3) 11.3 31.0
Profit & Loss (A$m) FY17E FY18E FY19E FY20E FY21E P/CF x n.m. n.m. n.m. 11.5x 4.2x
Revenue - - - 126 379 FCF - Diluted Ac (3.2) (1.5) (5.3) (42.4) 31.8
Operating Costs - - - (50) (171) P/FCF x n.m. n.m. n.m. n.m. 4.1x
Operating Profit - - - 76 209
Corporate & Other (4) (6) (6) (8) (8) Dividends Ac - - - - -
Exploration Expense - (0) (0) (0) (0) Dividend yield % - - - - -
EBITDA (4) (6) (6) 68 200 Payout Ratio % - - - - -
D&A (0) (0) (0) (2) (11) Franking % - - - - -
EBIT (4) (7) (7) 65 189
Net Interest Expense (1) (1) 1 (2) (10) Enterprise Value A$m 525 494 445 661 513
Pre-Tax Profit (5) (7) (6) 64 179 EV/EBITDA x (127.2x) (78.4x) (70.6x) 9.8x 2.6x
Tax Expense - - - (19) (54) ROE % (29%) (14%) (5%) 27% 43%
Underlying Profit (5) (7) (6) 45 125 ROA % (17%) (12%) (5%) 13% 36%
Signficant Items (post tax) (13) - - - -
Reported Profit (18) (7) (6) 45 125 Net Debt / (Cash) 6 (26) (75) 141 (6)
Gearing (ND/(ND+E)) % n.m. (108%) (163%) 46% (2%)
Cash Flow (A$m) FY17E FY18E FY19E FY20E FY21E Gearing (ND/E) % n.m. (52%) (62%) 85% (2%)
Operating Cashflow (9) (6) (6) 68 201
Tax - - - (10) (36) Reserves & Resources As at December 2016
Net Interest 0 (1) 1 (2) (10) Earl Grey mt % Li2O Li2O (mt)
Net Operating Cash Flow (9) (7) (5) 57 155 Measured - - -
Exploration (8) (2) (2) (2) (2) Indicated 78.5 1.44% 1.1
Capex (3) - (21) (270) (6) Inferred 49.5 1.43% 0.7 Additional Exploration Target
Acquisitions / Disposals (2) 40 - - - Resource 128 1.44% 1.8 75-100mt @ 1.3-1.5% Li2O
Other - - - - -
Net Investing Cash Flow (14) 38 (23) (272) (8) Proved - - -
Equity Issue 20 - 77 - - Probable - - -
Borrowing / Repayments 1 - - 167 (150) Reserve - - -
Dividends - - - - -
Other - - - - - Earnings Sensitivity FY21E FY22E FY21E FY22E
Net Financing Cash Flow 21 - 77 167 (150) A$m A$m % %
Change in Cash Position (2) 31 49 (49) (3) Lithium Carbonate Price US$/t +10% 23 23 18% 18%
FX Adjustments - - - - - Exchange Rate A$/US$ -10% 25 26 20% 20%
Cash Balance 3 34 83 34 31
Valuation Discount Stake A$m A$/sh
Mt Holland @ 40ktpa LCE (unrisked) 50% 1,224 3.06
Balance Sheet (A$m) FY17E FY18E FY19E FY20E FY21E Mt Holland expansion (unrisked) 50% 900 2.25
Cash 3 34 83 34 31
Other Current Assets 2 2 2 2 2 Mt Holland @ 40ktpa LCE 30% 50% 857 2.14
PP&E 0 0 21 288 283 Mt Holland expansion 80% 50% 180 0.45
Exploration & Development 22 24 26 27 29 Exploration & Other Projects 60 0.15
Other Non Current Assets 0 0 0 0 0 Corporate & Other (91) (0.23)
Total Assets 27 60 131 352 345 Debt (6) (0.02)
Debt 8 8 8 175 25 Cash 6 0.02
Other Liabilities 2 2 2 11 30 Option Strikes 8 0.02 P/NAV
Net Assets 16 49 120 165 290 Risk adjusted NAV 1,014 2.54 0.51
KIDMAN RESOURCES (KDR)
2 62 62626
MODEL SUMMARY: OPERATIONAL INPUTS & FREE CASH FLOW
Source: Company data, B lue Ocean Equit ies
Macro Assumptions FY18E FY19E FY20E FY21E FY22E
A$/US$ FX x 0.76 0.75 0.74 0.73 0.73
Lithium Carbonate Price US$k/t 12.8 12.0 12.0 12.0 12.0
Operational Summary FY18E FY19E FY20E FY21E FY22E FCF Contribution A$m FY18E FY19E FY20E FY21E FY22E
Mt Holland intergrated lithium project, WA (100% Basis) Mt Holland intergrated lithium project, WA (KDR's 50% share)
Mine & Concentrator
Plant throughput 2.0 2.0 2.0
Head grade 1.4% 1.4% 1.4%
Recovery 60% 60% 60%
Production lithium conc (6%) 288 288 288 Net proceeds from conc sales A$m 76
(First year only)
Refinery
Lithium Carbonate Production kt 40.0 40.0 Refinery Revenue A$m 329 329
Refinery Costs
Operating cost US$k/t LCE - - - 4.4 4.4 Operating cost 120 120
Sustaining capex US$k/t LCE - - - 0.2 0.2 Sustaining capex 6 6
Opex+Sustaining capex US$k/t LCE - - - 4.6 4.6 Opex+Sustaining Capex A$m 126 126
Cash Margins US$k/t LCE - - - 7.4 7.4 Cash Margins A$m 203 203
Cash Margins % - - - 62% 62% Cash Margins 62% 62%
Growth Capex - 21 270 - -
Exploration 2 2 2 2 2
Corporate Overheads 6 6 8 8 8
All-in Cash Margin A$m (8) (29) (204) 193 193
All-in Cash Margins - - n.m. 59% 59%
Corporate A$m FY18E FY19E FY20E FY21E FY22E
Cash Tax - - 10 36 55
Other Items (40) - - - -
FCF pre Debt Service 32 (29) (214) 157 137
Net Interest 1 (1) 2 10 0
Debt Drawdown / (Repayment) - - 167 (150) (17)
FCF post Debt Service 31 (28) (49) (3) 120
New Equity/Dividends A$m FY18E FY19E FY20E FY21E FY22E
Proceeds from Shares/Options - 77 - - -
Dividends Paid - - - - -
Change in Cash 31 49 (49) (3) 120
Cash Balance 34 83 34 31 151
KIDMAN RESOURCES (KDR)
2 72 72727
BOARD & MANAGEMENT
Brad Evans, Inter im NonBrad Evans, Inter im NonBrad Evans, Inter im NonBrad Evans, Inter im Non----Exec Chai rman: Exec Chai rman: Exec Chai rman: Exec Chai rman: Mr Evans is a Mining Engineer with nearly 20 years’ experience in the mining industry and is current ly the General Manager of Mining Plus Pty Ltd. Since complet ion of a Bachelor of Engineering (Mining) at the University of Bal larat, Mr Evans has gained a broad range of pract ical mining experience through seeking out a diverse range of roles. Mr Evans has an int imate knowledge of the mining industry, business strategy, operat ions, mine planning and software which is applied in combinat ion to extract the greatest value from projects and people. Mr Evans became interim Chairman on 2 Nov 2017 when the former Chairman ret ired. The search for a new Chairman has begun and discussions with several candidates are underway. Mart in DonohueMart in DonohueMart in DonohueMart in Donohue , , , , Managing D i rectorManaging D i rectorManaging D i rectorManaging D i rector : : : : Mr Donohue is the founder of Kidman Resources and has had over 15 years’ experience in equity capital markets and the natural resources sector where he has been direct ly involved in evaluat ing mineral projects at various stages of development. Mr Donohue is a director of several private and public companies focused on base and precious metals with projects in Austral ia and Sub Saharan Afr ica. He is also the principal of Penstock Advisory, a private consult ing and investment company based in Melbourne that special ises in ident ifying, managing and developing mineral projects in Austral ia and overseas. Mr Donohue has been instrumental in putt ing together Kidman’s portfol io of mineral projects in Austral ia. Dav id SouthamDav id SouthamDav id SouthamDav id Southam, , , , NonNonNonNon----Exec D i rectorExec D i rectorExec D i rectorExec D i rector : Mr Southam brings extensive industry experience including signif icant capital markets expert ise, famil iar ity with the set-up and operat ion of joint ventures, negotiat ion of substant ial internat ional commodity offtake agreements and has a background covering base and precious metals, bulk materials, contract ing and industr ial logist ics. Mr Southam is a Cert i f ied Pract icing Accountant with more than 20 years’ experience in accounting, banking and f inance across the resources and industr ial sectors. Mr Southam has been an Execut ive Director at Western Areas for nearly seven years and has previously acted as a Non-Executive Director of a number of ASX l isted companies. He is current ly a member of the Audit and Compliance Committee of Curt in University Council, and a member of the WA Advisory Board of Starl ight Children’s Foundation. Chr is Wi l l i amsChr is Wi l l i amsChr is Wi l l i amsChr is Wi l l i ams , , , , General Manager Operat ionsGeneral Manager Operat ionsGeneral Manager Operat ionsGeneral Manager Operat ions : : : : Mr Wil l iams is a mining engineer who has over 30 years experience in underground and open pit mining operat ions and management roles throughout Austral ia. Before joining Kidman, Mr Wil l iams worked for 12 years at Panoramic Resources in a number of senior roles including General Manager Operat ions for the Savannah and Lanfranchi nickel mines and General Manager Projects and Technical Services. Prior to Panoramic Resources Mr Wil l iams was Mine Superintendent for New Hampton Goldfields and Harmony Gold Mines at their Jubilee Operat ion near Kalgoorl ie. Michae l Green, Michae l Green, Michae l Green, Michae l Green, Exp lorat ion ManagerExp lorat ion ManagerExp lorat ion ManagerExp lorat ion Manager : : : : Mr Green previously worked with Newmont Mining and gained broad experience with varied mineral ised systems working in both the Regional Explorat ion Team in QLD, NSW and the NT before moving to the Tanami Operat ions in the Northern Terr itory where he was responsible for both near mine and Distr ict explorat ion. During his t ime at Newmont Mr Green was a part of the team that made the Oberon Regional discovery, and the near mine Auron Ore body discovery which has signif icant ly increased the Life of Mine at Newmont Tanami Operat ions. Mr Green is responsible for al l Explorat ion projects and near mine resource development and del ineat ion. Jason Eve le ighJason Eve le ighJason Eve le ighJason Eve le igh , , , , Chie f F inancia l Of f i cerChie f F inancia l Of f i cerChie f F inancia l Of f i cerChie f F inancia l Of f i cer : : : : Since quali fying as a Chartered Accountant with Ernst & Young in London, Mr Eveleigh has been act ive in private mergers and acquisit ions and has been engaged in the Austral ian f inancial services industry for the last decade providing compliance and f inancial support to corporate advisors. He has extensive capital markets experience and has developed a close working relat ionship with both the mining and explorat ion arms of the business.
KIDMAN RESOURCES (KDR)
2 82 82828
CONTACTS ANALYST AUTHORITY
Steuart McIntyreSteuart McIntyreSteuart McIntyreSteuart McIntyre
Senior Resource Analyst
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David O’HalloranDavid O’HalloranDavid O’HalloranDavid O’Halloran
Executive Director
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Philip PepePhilip PepePhilip PepePhilip Pepe
Senior Industrials Analyst
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Stuart Turner Stuart Turner Stuart Turner Stuart Turner
Senior Industrials Analyst
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Justin Pezzano Justin Pezzano Justin Pezzano Justin Pezzano
Research Associate
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Michael GergesMichael GergesMichael GergesMichael Gerges
Investment Analyst
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Mathan SomasundaramMathan SomasundaramMathan SomasundaramMathan Somasundaram
Market Portfolio Strategy
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Josie NicolJosie NicolJosie NicolJosie Nicol
Dealing Associate
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Adam Stratton Adam Stratton Adam Stratton Adam Stratton
Institutional Dealing
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Scott Calcraft Scott Calcraft Scott Calcraft Scott Calcraft
Institutional Dealing
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Doc Cromme Doc Cromme Doc Cromme Doc Cromme
Institutional Dealing
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Scott HildebrandScott HildebrandScott HildebrandScott Hildebrand
Institutional Dealing
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Tim PottsTim PottsTim PottsTim Potts
Institutional / HNW Dealing
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HEAD OFFICE
Blue Ocean Equities Pty. Ltd.Blue Ocean Equities Pty. Ltd.Blue Ocean Equities Pty. Ltd.Blue Ocean Equities Pty. Ltd.
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DISCLAIMER DISCLOSURE This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Blue Ocean Equities Pty Limited. This is general investment advice for Institutional and Sophisticated Investors only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives you should consult your own investment adviser before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Blue Ocean Equities Pty Limited has not verified independently the information contained in the document and Blue Ocean Equities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or by implication, that the information contained in this document is complete or accurate. Nor does Blue Ocean Equities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Blue Ocean Equities Pty Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person.
Blue Ocean Equities Pty Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document, and may from time to time hold interests in the securities referred to in this document. Blue Ocean Equities Pty Limited and associates may hold shares in Kidman Resources at the date of this report and this position may change at any time without notice. Steuart McIntyre does not own shares in Kidman Resources.