Cost increases rather than price spikes featured in the 1H23 result. Capex is increasing and although there is plenty of progress on major projects, there is some extra development risk sneaking in. The good news of a capital management framework review may get overlooked while consensus earnings revisions are likely to be negative.
Lithium. Production of spodumene at Greenbushes was another strong outcome (379kt) but with unit costs creeping up. When the McMahon contract takes over from 1 July 2023, we would expect to see some unit cost benefits in due course. FY23 production is expected to be at or above the high end of guidance. CGP3 remains on track for completion in 2H25 but FY23 capex on the project will be higher at $550-600m (from $420-480m).
Production at Kwinana is still well below Train 1 nameplate capacity. The revised ramp up profile should see Train operating at 60-70% of throughput capacity by the end of CY23 with capex increased by $20-25m.
The pricing mechanism for Greenbushes spodumene has changed, effective 1 January 2023. The reference pricing agencies now include Platts and still include a 5% volume discount. This should create a closer link between current market conditions and IGO’s received price.
Nickel. A fire at the Nova power station didn’t help, but lower grades also affected production. Pricing was also slightly soft. Production from Forrestania was crimped by lower throughput, grades and recovery. Cash costs were much higher and look to be hanging around so that guidance may be too low on this factor. IGO spent $77m at Cosmos in line with the development plan leaving about $265m more to spend in FY23f and a further $90-120m in FY24f.
IGO increased its interim dividend to 14cps, a payout ratio of 25% of underlying free cash flow. IGO flagged that its capital management framework is under review with an update expected at the full year result in August.
Investment View
IGO has a strong portfolio of assets and growth projects under development. Very high commodity prices have flushed substantial cash flow into the business so that financially, the company is well set. Operationally, things are getting harder as costs rise along with capex.
More concerning are the signs that lithium commodity prices are easing. This does not imperil IGO’s otherwise very sound outlook, but it suggests the current share price is sufficiently reflecting the situation.
Risks to Investment View
Exposure to spodumene and nickel prices and the AUD:USD are factors which could affect earnings. IGO has development risk across its assets although this is minimal in many cases due to asset maturity.
Recommendation
We have retained our Hold recommendation.
