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Core Lithium shares: where next after solid FY23 results?

Core Lithium shares rocketed 26% higher on earnings day but have now fallen flat. Is this an opportunity, or is further downside ahead?

core lithium Source: Bloomberg

Core Lithium (ASX: CXO) shares shot up by 26% to $0.43 last week after releasing strong full year results that investors hoped might spell the end of its share price woes.

For context, the ASX lithium stock — despite remaining over 700% higher than pre-pandemic levels — has now lost more than two-thirds of its value year-to-date. This reflects the falling lithium price and relatively bearish sentiment in the sector.

And disappointingly, CXO shares have fallen back to $0.34, the same price point prior to the results. However, this retracement could be due to wider macro concerns regarding the lithium pricing outlook.

Core Lithium shares: full-year results

FY23 results were received positively as the company announced a maiden profit. Revenue came in at $50.6 million, resulting in a net profit on $10.8 million — though this was boosted by a $1.6 million deferred tax benefit.

CXO sold 5,423 tonnes of spodumene concentrate at an average realised sales price of US$4,163 per tonne — and it also sold 14,774 tonnes of Direct Shipping Ore at US$951 per tonne from Finniss. Core Lithium saw C1 costs of $1,230 per tonne, leaving EBITDA at $14 million, and operating cash flow at $90.8 million.

The company held $153 million in cash at the end of the financial year, and crucially in this tightening monetary environment, also ended the year with no debt. And this figure doesn’t include either its $111.4 million raising or sales made after the reporting date — a further 23,100 tonnes of spodumene concentrate and 15,000 tonnes of lithium fines.

Where next for Core Lithium shares?

During the financial year, flagship Finniss saw its Mineral Resource Estimate increased by 62% to 30.6Mt @ 1.31% Li2O, including the BP33 Mineral Resource estimate of 10.1Mt @ 1.48% Li2O. Over the longer-term, this hugely improves the company’s business case.

CEO Gareth Manderson enthuses that ‘early works and the updated feasibility study at BP33, Finniss’ potential cornerstone asset, are progressing well and the project is on track for FID in the March quarter…our strategy to drive long-term shareholder value is unchanged – ramp up Grants production and deliver spodumene concentrate into long-term offtake agreements, grow the broader Finniss district mine life.’

Indeed, the company has already reaffirmed production guidance of 80,000 to 90,000 tonnes, and sales of 90,000 to 100,000 tonnes of spodumene concentrate, with C1 costs of $1,165 to $1,250 a tonne.

On the other hand, Core Lithium still has a potential lawsuit from Tesla to face down after the breakdown of a 2022 supply agreement — for 110,000 tonnes of spodumene concentrate. And the stock remains one of the most shorted on the ASX, despite the ongoing negotiations.

This week, JP Morgan downgraded the entire lithium sector after a review of lithium prices — with analyst Lyndon Fagan noting that ‘It is hard to build conviction on a near-term sector recovery, and therefore we rank the lithium space behind base & bulk commodities on a relative view.’ UBS is also bearish on the sector.

Further, a note from Citi predicted that prices may continue to fall by up to 20%, even after the 2023 correction. Citi cut Core Lithium and IGO to underweight, and Pilbara Minerals to neutral, leaving Allkem and Leo Lithium as overweight.

Conversely, Macquarie remains bullish on both lithium and lithium producers, seeing the current weakness as creating significant potential buying opportunities. It has an outperform rating on Core Lithium and a 12-month share price target of $0.65 — nearly double the current price.

It’s worth noting the continued merger and acquisition activity in the space. Allkem and Livent’s multi-billion-dollar tie-up. The Albemarle and Liontown merger, and Gina Rinehart’s involvement. Mineral Resources and its increasing stake in Delta Lithium.

While investment banks typically work on a 12-month basis, long-term investors need to balance any potential short-term weakness with the anticipated supply gap over the longer term. There is a finite supply of quality lithium producers.

As Core Lithium is now profitable and has no debt, it may even become a takeover target. But if not, its massively increased mineral resource stands it in good stead — and the current share price may now be looking attractive.

Of course, there may be further to fall.

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