Core Lithium (ASX: CXO) (OTCPK: CXOXF) shares have risen 20% since announcing its first annual profit. CXO shares may also be in the black here – moving from a development mining company to one that actually produces with a positive cash flow is an important step. Given the pain this will cause short sellers, it’s even possible to laugh a little. After all, around 8% of core equity is loaned to short sellers. However, the fact that such a large portion of equity is in short supply should give us pause for thought. Why are so many short? Agreed, the short position is down on Core Lithium, but still.
The announcement: “First spodumene concentrate produced (18,274 tons) and shipped (5,423 tons) by Finniss Operations. After year-end, 23,100 tons of spodumene concentrate and 15,000 tons of lithium fines were delivered to customers. • Finniss’ mineral resource estimate increased 62% to 30.6 million tonnes at 1.31% Li2O, including the BP33 mineral resource estimate of 10.1 million tonnes at 1.48% Li2O. • Initial revenue of $50.6 million, EBITDA of $14.0 million and net income after tax of $10.8 million. Operating cash flow of $90.8 million.” Well, that’s good operating performance. However, like Pilbara Minerals, which also has a large short position, it is true that the price of lithium has fallen over the last 9 months. It is actually down 75% from its highs. Next year’s delivery prices will not be as high as these historical numbers.
Core Lithium stock price from Google Finance
After this basic thing about the market price of production, we have another problem that we can’t seem to find an answer for. The full annual report is not entirely clear on this. It’s possible we’re wrong here, but our problem with Core Lithium: “As we’ve explained elsewhere about Core Lithium: “Well, the effect of such a contract is that if the price goes up after the contract is signed, the Price cap means that it is the processor and not the mine that benefits from the rising price. Therefore, given the volatility of the lithium price, it is of enormous importance what the cap and collar of this offtake agreement looks like. That’s something Core doesn’t tell us, but we can make a small guess about the likely ranges.
Note that this is a guess. An informed person, but nothing more. The acceptance contract – with cap and collar, recall – was signed at the beginning of 2021. When the price of lithium, i.e. the price of lithium concentrate, was at a very low level. And that’s why, in my opinion, Core Lithium doesn’t seem to have benefited much from rising lithium prices. Because much of its production is pre-sold at skyrocketing prices.”
Deliveries already made are made at current market prices. But they haven’t told us anything about a cap and/or collar on these long-term offtake contracts. That’s what we’re worried about. Which means we are not at all safe in the medium term.
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