Against a challenging backdrop for the lithium industry, Greenbushes mine posted a solid operating result in the first quarter of fiscal 2025. The mine is 25% owned by IGO IGO. Improved throughput, feed grade, and recovery rates saw spodumene concentrate production increase 22% on the June quarter, to 406,000 metric tons. While this was a touch below the September quarter of 2023, it beat our forecast by 4%. We continue to assume fiscal 2025 spodumene production at the top end of management’s guidance range of 1.35 million-1.55 million metric tons. The solid first quarter leaves the mine well placed to achieve this.

Higher output translated into lower cash costs, which at $277 per metric ton were down 18% on last quarter. Given a positive start to the fiscal year we reduce our full-year fiscal 2025 cash cost forecast by 6% to $330 per metric ton. But while cost containment is encouraging, earnings from Greenbushes have been crunched by weak lithium prices. At USD 872 per metric ton, realized spodumene prices are some 80% below the September quarter of 2023.

Our fair value estimate for narrow-moat IGO has been reduced 7% to $7 per share on a lower near-term lithium price assumption. We still expect lithium prices to increase to our estimate of the marginal cost of production, USD 20,000 per metric ton, by the end of the decade, from about USD 10,000 currently. But the recovery is taking longer than anticipated and the market remains oversupplied despite curtailments and project delays across the industry. We reduce our 2025 lithium price forecast 30% to USD 15,000 per metric ton, but our longer-term forecasts are essentially unchanged and IGO screens as materially undervalued. IGO’s lithium operations, comprising a 25% stake in Greenbushes and a 49% stake in the Kwinana hydroxide refinery, account for nearly 90% of our valuation. The balance is mostly made up of the Nova operation, IGO’s sole operating nickel mine after Forrestania was transitioned to care and maintenance after quarter-end.

Business strategy and outlook

IGO’s primary asset is a noncontrolling 25% stake in the Greenbushes mine, the world’s largest and lowest-cost hard rock lithium operation. The mine is operated by Talison Lithium, a joint venture between IGO, Albemarle, and effective-controller Tianqi Lithium. IGO is entitled to a dividend from Talison, paid out of free cash flow.

As electric vehicle adoption increases, we expect high-double-digit annual growth in global lithium demand. To capitalize on this, plans are in place to expand the Greenbushes operation. Two new concentrator plants are expected to be in operation by the end of the decade, which would see spodumene concentrate production capacity increase to around 2.5 million metric tons per year from a fiscal 2023 nameplate capacity of 1.5 million metric tons.

Through a joint venture with narrow-moat Tianqi Lithium, IGO also owns a 49% interest in the Kwinana lithium hydroxide refinery. Lithium hydroxide is primarily used to produce cathode materials for lithium-ion batteries. The spodumene feedstock for Kwinana is sourced from Greenbushes. We see Kwinana as cost-disadvantaged relative to hydroxide refineries in China, where capital intensity and operating expenses are significantly lower. However, while not our base case, Kwinana could attract a premium for its product in a scenario where geopolitical tensions escalate, and supply chain security becomes front of mind.

Kwinana’s first train has been hamstrung by engineering issues since production began in 2022 and still operates below capacity. The business case for the partially constructed second train, or Train 2, is under review, and it is possible it could be abandoned before going into production. On our forecasts, the remaining capital required to complete Train 2 essentially offsets discounted future cash flows, so our fair value estimate for IGO would not likely be affected.

IGO also owns and operates the Nova nickel-copper-cobalt mine, which has roughly three years of remaining life.

IGO bulls say

  • As the lowest-cost spodumene operation in the world, Greenbushes should earn returns above WACC in most lithium price environments.
  • The Kwinana refinery is one of the few producers of lithium hydroxide outside of China. If geopolitical tensions escalate, Kwinana may attract a premium from customers looking to derisk their supply chain.
  • A healthy balance sheet provides ample capacity for future investment, like the well-timed acquisition of the Greenbushes stake.

IGO bears say

  • Lithium prices may not recover to our midcycle assumption if electric vehicle demand grows more slowly than expected.
  • The economic viability of refining lithium hydroxide in Australia is unproven. Australian refiners face higher capital intensity and operating expenses than competitors in China.
  • China-domiciled Tianqi Lithium owns the controlling stake in Greenbushes and the Kwinana refinery. IGO’s lithium assets may be deemed ineligible for US Inflation Reduction Act subsidies under “foreign entity of concern” restrictions.

Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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